What stock market anomaly is the September Effect?

There exist multiple stock market anomalies that are discussed and debated by stock brokers and investors alike on the legitimacy of using reoccurring market patterns to beat the market.

You may have heard of some of these patterns – the January effect, the notion that poor performing stocks in the fourth quarter outperform in January. Or how about the small firm effect, where a portfolio of smaller companies tend to outperform larger companies. There is also the SANTA CLAUS RALLY, DOGS OF THE DOW, SUPER BOWL INDICATOR, SELL IN MAY GO AWAY to name a few.

So you may be wondering what effect, if any, the market will have on your investment portfolio as we head into the Fall trading season. This brings us to the latest anomaly, the September effect. You can date back 100 years or longer and discover that the month of September has delivered, historically, below average performance for stock investors.

As an investor, you may have experienced a substantial amount of your wealth rise with the market since the bull rally starting in March of 2009. And for those who are aware of the historically low performing trend in the month of September, you may be wondering if it’s time to back up the truck and take some profits.

Historically, bull and bear markets occur with the almost automatic expansion and contraction of the economy. The events that turn a bull market into a bear market and vice versa are events that economists and market analysts have studied over long periods of time. They are considered the ebb and flow of wealth accumulation. Bear markets, for instance, are viewed as normal and necessary, as they serve to “clean up” what are considered prior economic excesses.

So should you be concerned with the possibility of a pull back or a correction or worst case, a bear market?

Simply put, absolutely not! What all investors should realize is that bear markets create an excellent opportunity to buy low and sell high. It is the long-term picture that investors need to keep in mind.

Did you catch that? The answer to experiencing positive returns on your portfolio at the end of the day is simply holding your investments for the long haul. I’m sorry to disappoint those of you who anticipated a romanticized or mystical answer to beating the market, but it is basically a matter of your holding period.

Long term investing is more often about the psychological aspects of managing money and sticking to a financial plan. It is important to understand how market conditions create euphoria or fear in some people. The general rule is that market declines will inevitably always happen. Bear markets prepare the way for future bull markets. And, while investing carries specific risks, many of those risks may become more acceptable and tolerable by remembering that what is occurring in a bear market is a revaluing of securities.

Whether you can beat the market using market anomalies is up for debate. However, creating a well-diversified portfolio consistent with your goals and objectives combined with a long-term outlook and low expenses will help deliver the returns you would expect from holding an equity portfolio regardless of what month you are heading into. Happy investing!