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Is October the Scariest Month for the Market?

October's also known for scaring investors. The infamous Black Tuesday stock market crash of 1929 was on Oct. 29, and it began a bear market that would eventually see the Dow Jones Industrial Average fall by nearly 90% from its highs during the depths of the Great Depression.

The market crash of 1987 happened on Black Monday, Oct. 19. And although the market plunge in 2008 started in September, October featured some notable declines as the global financial crisis played out, including two of the 20 largest percentage drops for the Dow.

Now, we're about to head into another October, and the markets are getting jittery again. News from China about real estate firm Evergrande's (OTC: EGRNF) potential debt default reminded some investors of Lehman Brothers in 2008. Inflationary pressures and the ongoing pandemic are raising concerns about the strength of the economy.

So is October jinxed? Is a crash imminent? Should you bail out of your stocks right now?

Key Takeaways

  • October has a reputation for being a terrible month for the stock market, with high-profile crashes having happened during past Octobers.
  • Psychology does play a role in the market, and if enough investors believe something, it can become self-fulfilling.
  • Investors should expect market downturns to happen regularly and at any time of year, but over the long run, gains sharply outweigh the short-term losses during those downturns.

In a Word: No

Obviously, no one here is going to tell you to change your entire investing strategy based on any short-term market timing consideration. That's not our style. We recommend stocks you can hold through thick and thin in search of long-term gains, and we have a pretty good track record with it.

Beyond that, though, it pays to look at the numbers. Statistically, October is definitely not the worst month for investors. Since the late 1920s, the market has finished October with a positive return nearly 60% of the time, and on average, it has gained ground. Contrast that with the month of September, which has finished down more often than up — the only month in which that's the case. February and May are the other two months to have sported losses on average over that time frame.

Is October Safe Then?

Even with statistics on our side, you should never discount the power of market psychology. As we've seen with meme stocks and short squeezes this year, a motivated base of individual investors can have a dramatic impact on the overall market. Those investors can maintain stock price moves that look irrational on their face for a long, long time.

Given that, it's also entirely possible for investor psychology to turn an irrational fear about October into a self-fulfilling prophecy. If markets start to lose ground, then some investors reflexively look to the exits. Others start thinking about tax-loss harvesting, which can exacerbate selling pressures on the market.

Be Ready for Downturns - Any Time of the Year

The unfortunate truth is that despite its reputation, October doesn't have a monopoly on market corrections and plunges. The last huge market drop in 2020 came in February and March. 2018 brought two big declines — one in January and another in December.

Smart investors know that downturns are inevitable. But rather than letting the prospect of a downturn scare them, they understand that the risk from investing in stocks is what makes the strong returns from stock investing possible. And when you look at the long-term gains in shares of the best companies, you'll quickly see how insignificant even major crashes end up being.

So decorate your house, dress up as a witch or ghost come Halloween, and enjoy the fright-fest that October celebrates. But don't worry about your stock market investments. Even if a downturn happens, it's perfectly normal — and it won't change the long-term promise of the great stocks you own.

What do you think about the market situation now?

Do you think it will crash?

What do you intend to do about it?

Please leave your comments below.

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