Should you dump stocks in September?

Television correspondent Sabrina Quagliozzi reports from inside the Nasdaq MarketSite in New York's Times Square, Monday May 21, 2012. Facebook's stock is tumbling well below its $38 IPO price in the social network's second day of trading as a public company on Monday.
AP Photo/Richard Drew

(MoneyWatch) COMMENTARY As stocks begin trading this month, the media is already warning to stay away.

The "Breakout" investing segment on Yahoo Finance warns investors to fasten their seatbelts.

An article that accompanies the video below notes:

In fact, 60 years of almanac analysis pegs the average September decline at -0.5% for the S&P 500 and -0.8% for the Dow Industrials. The worst September came in 1974 when the S&P 500 fell 11.9%, while the best monthly gain was posted just two years ago when the index rose 8.8%.

And we need only go back to last September when stocks finished down 7.8 percent as measured by the total return of the Wilshire 5000.  That was the fifth consecutive month of declines and investors were braced for a record setting sixth month.

With one exception that I'll mention shortly, I avoid market timing, so I won't be selling my stocks and sitting out September. 

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Philosopher Soren Kierkegaard once wrote that life can only be understood backwards, but must be lived forwards.  That tendency to look backwards for understanding is as good an explanation as any for why we search the past for patterns, despite the fact that such patterns are rarely predictive of the future.  Statistically speaking, one month has to be the worst month of the year just like another has to be the best.  And though September could certainly turn out to be another bad month for stocks, it is just as likely to turn out to be a good month.

To illustrate the folly of looking for patterns, we need only go back to the USA Today story by Adam Shell citing the fact that the Dow declined for seven consecutive Mondays as "statistical proof" investors remain wary of stocks.  His recent column mentions that stocks rallied 10 percent over the summer before issuing his September warning. If you followed his timing strategy, you missed out on this rally.

Now here's the exception to market timing, and it isn't based on silly patterns, but rather based on performance. I buy on declines and sell on advances.  I call this market timing strategy "rebalancing" to my target allocations.  That meant buying last September after five straight months of losses, just as it did more than once after the 2008 and early 2009 market plunge, and selling a bit so far this year.   

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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.