Different Makes a Difference^®

Don’t Be Spooked By October

With markets sliding on the first day of October, Global BC TV and CBC Radio came calling to get our take on the “correction.” October is notorious as a bad month for stocks, so we understand why the media is looking for a story. But never before in my 25-year career do I remember hearing from the media so early in a correction. It speaks to the nervousness of investors, which is good from a contrarian perspective.

Bad things often happen in October, and indeed the biggest one-day stock market crash occurred in October 1987. However, from a seasonal perspective, September is actually the worst month for stocks; October is second worst. 

The recent market action is not particularly noteworthy. At the close of trading on October 1, 2014, the major Canadian and U.S. benchmark stock indices were down 5.4% and 3.2% from their respective highs. In Canadian dollar terms, the U.S. S&P 500 Index was down less than 2% from its record level.

In the stock market, volatility should be expected. Since WWII, the S&P 500 has experienced 175 corrections of 5% or more – that is roughly one every 2½ years. 

How the stock market will behave month-to-month is unknowable. There will be more corrections, and some of them will be big.

Those who try to anticipate corrections invariably underperform. Those who accept them do well. 

We regularly share studies that highlight the abysmal experience of investors. Those who do poorly tend to chase trends and react to headlines. They would likely jump at the chance to buy an iPhone 6 at a 5% discount, yet reach for the sell button at the first sign of market stress. This isn’t buy low-sell high thinking!

You don’t get rich in the stock market by trying to outsmart other investors and second-guess the market action in the short term. It’s simply too hard.

The world’s wealthiest investors got rich by owning good businesses over the long run. Good businesses grow and compound value internally, and the rising tide of intrinsic value ultimately accrues to patient, long-term investors.

Rather than wonder and worry if there is going to be a correction, ask yourself, “How am I going to react when the inevitable correction arrives?” The answer needs to be, “I’m not going to do anything or I’m going to buy more.” 

If that isn’t the answer, then you should work with your investment advisor and adjust your asset mix to reduce portfolio volatility and your chance of panic.

The right asset mix is different for everyone, and it’s important that you get it right so that you have the conviction to hold good businesses through the good times and bad.