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Historically, The Worst Month… September Paints A Clear Picture Of Investors Greatest Folly

September is a pivotal month in the calendar year for many reasons. It signals the end of summer. For those of us with young children, it restores normalcy as they return to their much-appreciated schools. Residents of all regions (except the west) begin to appreciate their time zone as the beauty of the fall season begins, reminding them why they endure the summer humidity.


For investors, it should be the ninth month of the year or the end of the 3rd quarter. Business as usual… right? But nope. It’s the worst-performing month of the year. The chart below demonstrates September's lag over the past 5, 15, and 30-year periods. If you looked at a chart going back to 1950, you would see the same deficiency. So, what gives?



The folks who want to put logic to this have many reasons to rationalize this anticipated drop that occurs more often than not. The two that stand out are:


· Traditionally, the summer months are light on trading activity. Many on Wall Street are on an extended vacation; therefore, the stock market is not getting full participation, resulting in less than usual activity, which could potentially result in a bias to the upside. Maybe? In the past, I’ve written about the Sell in May and Go Away stock market adage… perhaps it’s true?


· With September closing out the 3rd quarter, investors are back and highly focused on the 4th quarter. For obvious reasons, the most significant three months of the year. If the economy is chugging along, then smooth sailing. If not, things could turn grim, so we should jump ship in September rather than risk the bloodletting of the last quarter of the year. Um… I guess, maybe?


Any given year will have specific reasons why selling should trump buying in September, driving monthly performance to the worst of the year. But guess what? It’s all rubbish! The real reason the year’s ninth month typically sees the stock market decline is investors' greatest fear rears its ugly head… fear itself!


For the individual investor, information overload (i.e., the talking heads on TV) can lead to rash sell decisions to “lock in” year-to-date gains or avoid the pending doom of the 4th quarter. Individuals are predisposed to make poor decisions depending on the year and the associated stock market climate. And, of course, everyone knows September (and even into the beginning of October) is the worst performance month of the year. It’s a self-fulfilling prophecy!


The professional investor is driven by a whole different circumstance… the paycheck! Unlike independent advisors (such as us), a good percentage of Wall Streeters' income is paid via bonus. A bonus that is driven by performance (i.e., asset growth). Therefore, the fear of “losing” a chunk of your pay because the 4th quarter is a dud could be a reality. As the saying goes, a bird in the hand is worth two in the bush!


As you can imagine, this thought process needs to be revised. Making investment decisions with the short-term in mind turns you into a speculator. And you should stop at that point and realize the error of your ways. By speculating, you have opened yourself up to chance… the chance you will miss out on the long-term gains you deserve. Or even worse… the best days the market offers. Missing these days will drastically reduce your overall returns.


Look no further than the graphic below. Over the past twenty years, if you were not invested for even just the ten best days, your portfolio suffers more than 50% than if you stayed invested throughout. The longer you stay out of the stock market, it gets worse!




And to throw salt in the wound of the speculator, half of the best days for the stock market during these past two decades occurred during the 4th quarter of the year (see graphic below). That’s right, if you joined the “It’s September, the worst month of the year, I’m going to sell” bandwagon… you would have likely missed five of the best days in the market. Ouch!




The last three months of the year are precisely that… three months! A mere ninety days within thousands of days of this investment journey. Who cares about the end of the year? You are invested for the long term. If anything, you need to take advantage of those who sell out in September…. zig when the rest of the investment world is zagging.




Note: Nothing in this letter should be considered investment advice, research,

or an invitation to buy or sell any securities.


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