To be successful in any field, it is necessary to analyze the mistakes that you have made in the past and learn from them to ensure that they do not happen again. This statement holds true in financial markets as volatile markets come and go throughout the years. These volatile markets often produce bad days for US stock market in the month of October; with 70% of the worst days in US stock market history occurring during this month. Investors make investments into various asset classes with a specific target allocation for each class. During panics, many investors move assets away from a certain class and into another class or sit by and wait for the panic to pass. According to David Swensen, “Perhaps the most frequent variant of market timing comes not in the form of explicit bets for and against asset classes, but in the form of passive drift away from target allocations” (Higgins). Instead of following the plan they have in place for how much funds were allocated to each target class, they panic and let their gains ride into bull markets then become even more panicked and freeze up when markets fall into bear territory. Instead of having this trend continue, investors should always rebalance their portfolio even if they feel uncertain because of the volatile market. As wise investors, we must learn from our mistakes to ensure that we rebalance our portfolios and do not panic and freeze up during times of uncertainty.
Overall, this article does a good job at exhibiting why most of the US stock market’s worst days have occurred in October. We saw that the financial scares that occur in October are remains of the agricultural financing cycling of the 1800s where farmers harvested and shipped crops in the fall. These shipments were funded by large cash withdrawals from local banks which then withdrew the cash from the New York City banks and trusts (Higgins). These numerous large withdrawals around the same time made Wall Street financial markets susceptible to panic. Although the United States has moved to an industrial economy with a central banking system, the numerous scares that have occurred in October throughout the years have caused investors to become conditioned to panic during this time (Higgins).
As an investor, you must be aware of trends and rebalance your portfolio when necessary. Historically, September has had more down markets than October, but October has had more singular bad days that September (Beattie). This shows that the “October effect” is very psychologically driven and if investors rebalance their portfolios accordingly instead of giving into the October scare, the dreaded “October effect” can be mitigated or reduced drastically. The hesitancy to tactically allocate assets is due to the fact that many funds are advised by non-discretionary investment consultants who do not have the authority to rebalance portfolios (Higgins). Because they do not have the authority to rebalance portfolios, they often neglect to advise their clients to do so. Trustees must take action to guarantee that they do indeed rebalance during times of uncertainty.