October is known for being a spooky month. Most people associate these four weeks with ghosts and goblins, but some financial industry members begin to prepare for a different spooky phenomenon, the “October Effect.” This is a Wall Street superstition that suggests that financially damaging events are more likely to occur during the month of October. And that belief is not without merit. Historically, October is the month that averages 36% more volatility than any other month. (1)
Market volatility typically brings a feeling of nervousness with it. People get worried about their investments, and some make quick and emotional decisions without doing proper research. And when you combine strong emotions with hasty decisions, the outcome can be disastrous.
Is economic uncertainty always a bad thing? Or does it come with a silver lining? To help encourage you during October, here are four tips to remember about market volatility.
- Market volatility is the norm, not the exception. As much as we wish it wasn’t, market volatility is normal – especially if you are in the stock market. In fact, in the S&P 500, a drop of 5% or more occurs about three times per year on average. A decline of 10% or more happens approximately once per year, and the index sinks 15% or more about every 3.5 years. (2) Keep in mind, these numbers reflect an average. This means that there could be more extreme declines. But a period of recovery typically follows a market dip.
- Patience is key during stock market drops. As Warren Buffet once said, “The stock market is a device to transfer money from the ‘impatient’ to the ‘patient.'” (3) While apprehension is a normal emotion during market volatility, it’s important to have perspective. For example, during the Great Recession (2007-2009), when the housing bubble burst and markets around the globe sank, many market participants lost more than 50% of their money. However, for those who stayed the course, the S&P 500 was back at an all-time highs by 2013. It’s never pleasant to watch stock prices plummet, but if you look at it as a normal part of the investment process, you may gain the perspective of hastily exiting the stock market too early.
- Market volatility provides opportunity. Remember K-Mart’s blue light specials where you could buy items for clearance prices for a limited time? Stock market declines often provide opportunities to purchase stocks below value and position yourself for long-term success.
- Trying to time the stock market is usually a bad idea. We’ve all heard the commercials where the spokesperson has “broken the code” and figured out how to time the stock market. And while this may be tempting to learn how to sell at the perfect time and buy back in at the “ideal” time, research has shown that it typically doesn’t work. That’s not to say that there aren’t those situations where windfalls of money are made. However, those are the exceptions to the rule, not the norm. Historically, many of the stock market’s best days have been immediately followed by the most significant drops. Additionally, data has shown that if an investor missed the S&P’s ten best days in every decade going back to 1930, the total return stands at around 28%. But if that same investor had held steady through the stock market peaks and valleys, the return would have been 17,715%. (4)
So what’s the main lesson to learn when the market is volatile? If you haven’t prepared for these inevitable periods with a comprehensive retirement plan, you may be in for a rocky financial road. And if you’re nearing or in retirement, recovering from such a trip is often more complex. If you haven’t prepared, it’s not too late. Click HERE to gain access to the same financial planning tool that Osiwala Financial Group Advisors use and begin to build your retirement plan from the comfort of your own home. Not ready to make your plan yet? Schedule a 20-minute “Ask Anything” session with one of our Advisors to gain clarity on your financial retirement journey by clicking HERE.