The possibility of a stock market crash keeps many investors awake at night. After all, stocks are volatile assets. History suggests share prices can sometimes endure sudden, massive declines during financial meltdowns. This can result in potentially significant paper wealth losses for shareholders in a variety of companies.
October is one of the most notorious months in the financial calendar when it comes to stock market turbulence. So, are equities likely to plummet in the next few weeks? Or should I ignore fearful headlines and focus on my long-term investing journey?
Let’s explore.
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A spooky Halloween?
A look back through the annals of financial history suggests investors should be wary of October. The Bank Panic of 1907, the Wall Street Crash of 1929, and Black Monday 1987 all occurred in the tenth month of the year. These are among the worst stock market crashes the world has ever seen.
Due to the cluster of major historic crises concentrated in October, many traders will be anticipating the possibility of some painful red days over the coming weeks. But, are such fears justified?
It’s worth noting that October has also marked the start of several major long-term stock market rallies. These include Black Monday itself and the 2002 nadir of the Nasdaq-100 after the bursting of the dot-com bubble. Turning closer to home, the performance of UK shares in recent years suggests British investors who sit this month out can sacrifice good returns in the process.
From 1996 to 2020, October was the third-best month for the FTSE 100 index. With a 1% monthly gain on average, the index’s performance in October trailed only April and December. Indeed, investors would have made a positive return in October, 75% of the time over that period.
Long-term investing
These contrasting data points highlight the difficulty short-term traders are likely to experience when navigating the coming weeks. But, as a dedicated follower of the long-term Foolish investing approach, October looks much like any other month to me.
Granted, there’s a possibility the stock market could crash. Recession risks hang over the global economy, China’s real estate crisis has further to go, and rising bond yields are impacting equity risk premium calculations. It seems there is no end to the list of factors that could cause share prices to slide.
However, that’s far from a certain outcome — and accurately predicting the near-term direction of the stock market is an art that’s almost impossible to master. By adopting an investment horizon that spans years (or even decades), I’m preparing myself for volatility and focussing on long-term returns rather than daily market movements.
Indeed, stock market investing isn’t a risk-free endeavour. In all likelihood, I’ll endure multiple crashes over the course of my investment journey. My preferred strategy for dealing with volatility is learning how to control my emotions and not selling my shares in a panic, rather than dancing in and out of my stock market positions.
As we enter this potentially tricky month, I’ll be investing in companies that look attractively valued and continue to hold my existing shares. As the old refrain goes, “time in the market beats timing the market“.
