September is the Market's Cruelest Month

September is historically the worst month for stocks, so let's just get out in front of this right now: If we see the same kind of heavy selling and nauseating volatility we had in August, do not panic. You're only liable to make matters worse, as the figures below will show.

Over the last 50 years the Dow has recorded an average decline of 0.8 percent in September, according to Bespoke Investment Group, making it by far the crummiest month of the year for the blue chip index. Indeed, only two other months have also posted declines, on average, over the last half-century: June at -0.6 percent and February at -0.03 percent.

Traders come back from summer vacations looking to clean up positions before the quarter ends, the thinking goes, so don't be surprised if September is a dud. Not to be cynical, but after August's action, a drop of only 1 percent would almost be a blessing.

But that's not the point here. Rather, it's to steel yourself in case another selling stampede hits the market, by reviewing how August ultimately played out.

If you sold into the maw of last month's panic selling you did your portfolio a great disservice. More important, if you had the fortitude to buy during the ugliest days of August, well, you likely generated some impressive returns.

Here's how four major market indexes fared last month by price value. Note the gains from their maximum monthly closing declines to August's end:

Wilshire 5000 Total Market

• August performance: -6.7 percent
• Maximum decline: -14.7 percent
• Change from maximum decline: +9.4 percent

Dow Jones Industrial Average

• August performance: -4.4 percent
• Maximum decline: -11.7 percent
• Change from maximum decline: +8.3 percent

S&P 500

• August performance: -5.7 percent
• Maximum decline: -13.4 percent
• Change from maximum decline: +9 percent

Nasdaq Composite

• August performance: -6.4 percent
• Maximum decline: -15 percent
• Change from maximum decline: +10.2 percent

The figures speak for themselves. If you dumped stocks during the panic selling, you likely locked in double-digit percent losses for the month. But if you stayed frosty during the sell-off, your losses were far more muted.

Most important, if you made regular 401(k) contributions or dollar-cost averaged into your holdings, you bought more shares at lower prices. In other words, you bought low. That's why my colleague Allan Roth says, "Personally, I feel better about buying stocks after a decline."

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