A stock market tale of two Augusts


(MoneyWatch) COMMENTARY As we entered into August of this year, my mind did a flashback to August 2011. Last August, the stock market swung wildly and ended up with a pretty hefty loss, reminiscent of the market plunges of 2008 and early 2009. Luckily, the only thing the two Augusts had in common was the heat, as stocks couldn't have been more different.

Using the total return of the Wilshire 5000 as the broadest measures of the U.S. stock market, the market was gut-wrenching last August. It resembled the cardiogram of someone having a heart attack and sometimes I felt like the wild swings and huge losses would give me one. Markets partially recovered later in the month and ended up down 6.0 percent as Standard and Poor's downgraded U.S. Treasury debt. A full financial collapse seemed possible again as investors flocked to Treasuries, the very security that was downgraded.

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August of this year was just about the opposite. Though it resembled the flat-lining cardiogram of a patient just pronounced dead, the market was alive and kicking. While the market gained a respectable 2.4 percent, it did so in a most boring way. I'm not complaining - that translates to a 32.9 percent annual increase.

Data from Wilshire Associates

Lessons Learned
There are a couple of lessons learned from this tale of two Augusts. First, it's impossible for humans to avoid finding patterns. I'm sure I wasn't alone in wondering if this August would be as painful as the last one. Luckily, this wasn't my first rodeo and I knew better than to act on my anxiety.

Second, memories are very biased. I was curious if August of this year was the least volatile month ever. I posed this question to Robert Waid, managing director of Wilshire Analytics. It turns out we only needed to go back to January of this year to find a less volatile month. And while August 2011 was very volatile, we needed only to go back to March 2009 for a more volatile month. I was exhibiting recency bias.

What does this tell us about how stocks will perform in September? Absolutely nothing and that is the key point. The key to successful investing is to know we don't know the future, rather than to buy and sell as if we do.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.