“OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”
So said Mark Twain, and he was as accurate as he was witty. I had some data compiled by Vanguard Investment Strategy Group that show no great difference in the distribution of stock market returns among the 12 months of the year. October is no better or no worse than the 11 other months, denoted by the red squares in the accompanying chart.
But I’ve experienced two rather harrowing Octobers in my investing career: October 1987, when U.S. stocks fell nearly 23% during the month, and October 2008, when stocks dropped more than 17%. October 2014 feels like déjà vu all over again, as Yogi Berra reportedly quipped. Through October 15, stocks were down about 5.5% for the month.
What the remainder of October (and July, January …) will bring for the stock market, no one knows. However, it may be a good time to step back and reassess your portfolio. Three possible actions:
With the run-up in stocks over the past five years, is your portfolio now heavy on the stock side? If it’s more than 5% off your target, consider rebalancing.
Another possible course is a pearl of wisdom from Vanguard founder John C. Bogle that I plucked from my files. (As an aside, I am a notorious pack rat and Vanguard’s unofficial archivist.) In an interview on investment risk in, coincidentally, October 1993, Mr. Bogle offered “Sell down to the sleeping point,” meaning that if your stock allocation and the volatility in the markets are keeping you awake at night, reduce accordingly for a better night of shuteye.
Note that any changes should be gradual and incremental. If you’re 70% stocks/30% bonds today, you shouldn’t go 30% stocks/70% bonds tomorrow.
Do a gut check
A little mental preparation for a possible downturn may also be in order. “Take out a piece of paper,” my eighth-grade Social Studies teacher would declare before foisting a pop quiz upon the class. In your case, no quiz, but write down the amount of the equity portion of your portfolio and reduce it by 20% (multiply by 0.80). Next, imagine you’re looking at your balance a month hence─your $200,000 stock fund position is down to $160,000. It’s a loss on paper, but is it something you can stomach?
For a long-term investor, the answer should be yes. But in the throes of a market decline and a significant dollar loss printed on an account statement, some investors are apt to make emotional rather than rational decisions. Conducting this exercise now may help you stay the course in the case that stocks take a nosedive.
Caveat: This is a behavioral investing exercise focusing solely on the equity portion of your portfolio. Presumably, you hold a balanced portfolio with exposure to bonds that may cushion against a sharp decline in your stock holdings. We also recommend that you examine the performance of your entire portfolio rather than looking at the components in isolation.
A viable option may be to do nothing. If you’re comfortable with your asset allocation, and your time horizon hasn’t changed dramatically, do nothing.
The market going up or the market going down should have little impact on your long-term plan. Indeed, you might, to paraphrase Kipling, treat those two impostors just the same.
Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.