fter a long summer, one tends to embrace the fall with open arms. October ushers in cooler weather, colorful leaves, and Halloween and that Halloween is exactly what happens in the finance world. Forget ghosts, what some people dread in October is the Bear-i.e., the Bear market. It is the most feared month in the financial calendar. Some people dread this month and its potential impact on their investment portfolio owing to its infamous dark days in history. October has a bad rap for market crashes: the Panic of 1907, Black Monday in 1929, and Black Monday in 1987. This buy-and-hold philosophy has been accepted by much of the market. It hopes to avoid a whip saw movement when the market goes down and then immediately turns the other direction. However, the October effect is more of an overhyped effect.
This is a psychological effect rather than anything to blame on October. The majority of investors have lived through more bad Septembers than Octobers, but the real point is that financial events don’t cluster at any given point. Black Wednesday occurred on September 16, 1992, with George Soros’ raid on the British pound. Also the original Black Friday took place on September 24,1869. There are investors as well as financial professionals who hold very closely to this theory, sometimes to the point of taking extra safeguards to protect their portfolios for the entire month. Others feel that the October Effect is more of a superstition than a well-documented recurring phenomenon within the marketplace, and tend to do little of anything in the way of special preparation. Instead of reacting emotionally to stock market shifts, or the perceived October effect, one should stick with the original investing plan. Regardless of the current market climate, the investing strategy should focus on individual goals, risk tolerance, and investing timeline.