October can be frightful for stocks

Market Analyze CBS/iStockphoto

(MoneyWatch) While September traditionally has been the worst month for stocks, October might be called the month of scare and fear. The reason is that five of the 10 worst trading days for the S&P 500 Index, including the three worst, occurred in October. (Thanks to Howard Silverblatt of Standard & Poor's for the data.)

October also contains three of the worst 10 months. October 1987 saw a loss of 21.76 percent, October 1929 saw a loss of 19.93 percent and October 2008 saw a loss of 16.94 percent.

Want some more bad news? While the average monthly return for the S&P 500 from January 1926 through August 2012 was 0.94 percent, the average monthly return in October was 0.34 percent, just 0.05 percent greater than the monthly average return on riskless one-month Treasury bills. The question is: Does this type of information have any real value?

Identifying patterns that worked in the past doesn't necessarily provide you with any useful information about stock price movements in the future. Unless there's a logical explanation for cause and effect, it's likely the finding is nothing more than a random outcome with no predictive value. And in this case, there's clearly no logical reason for stocks to do poorly in October. In fact, the S&P 500 rose 10.77 percent just last October and that was only the third best October.

Bottom line, have a plan, stick to it, and ignore the calendar and the investment porn put out by the much of the media and Wall Street. In general, it's meant to get you to act (or at least pay attention) when inaction is more likely to prove to be the best strategy.

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    Larry Swedroe is a principal and director of research for the BAM Alliance. He has authored or co-authored 12 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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