Supposedly, August and September are 2 of the 3 months in which the stock on average has a negative return. Is that true?
It depends on what time frame you use. Over the last 50 years August has been up 29 times and down 21, for an average return of 0%. Over the last 25 years the numbers are 14 up, 11 down, average return -1.1%. Over the last 10 years, it is 7 up, 3 down, average -0.1%.
Further, losses tend to be bigger in August than the gains. In the last 25 years, there are 5 months with gains of 3% or more and only one greater than 5%. On the downside, there were 7 months with losses of more than -3% and 6 of those had losses greater than -5%, with one loss of -14%.
So, yes, I’d have to say that August is not generally a good stock market month. The percentage of winning Augusts is less than the average of all months and the losing months tend to have larger losses than average.
What about September? Well, in recent years, September has been a rotten month for stocks, with easily the lowest average return of all 12 months.
Since 1999, September has been down 7 times and up 7 times, and the bad months have tended to be really bad, with the 7 monthly losses being -7.1, -9.6, -1.2, -11.0, -8.1, -5.4, and -2.9%. Ouch!
Of course, 5 of those 7 bad months fall in two of the worst bear markets since 1929, so maybe that’s not fair. Let’s look at the last 25 years. We get 13 up, 12 down and an average loss of -0.5%. That’s closer to breakeven but who invests in stocks to break even?
Does that mean you shouldn’t own stocks in August or September? I wouldn’t necessarily say that, because there are trading costs and often tax costs associated with selling individual stocks. Even with no-load mutual funds you have the issue of when to get back in. Most people will be late, waiting until they see and miss good returns before they jump back in, therefore giving back the advantage they gained. The way I feel about market timing is that it looks like a fantastic idea, but like the gambler at Vegas, while he may hit a hot streak, in the long run, he will be a loser.
But, for a very risk-averse investor, sitting out the next two months may not be a bad idea, especially since the market so far this year has already gained 20%.
If, like most people, you are going to stay in, you have two choices. You can either 1) hedge your positions by buying a fund that profits when markets drop or 2) stick to lower volatility funds and hold a little extra cash. Given my aversion to all-in or all-out short-term market timing, Door #2 is what I am choosing right now.