How to Handle a Spine-Chilling September

If you haven't already, you'll hear it soon: When it comes to bad months for the stock market, September takes the cake. But even with plenty of uncertainty in the financial markets to worry about, you can't count on seasonal factors to push down stock prices. If you sell, you might well miss what turns out to be the next big market rally.

Wake me up when September ends
Stock market history provides almost as many statistics as the game of baseball, and market analysts pore through the numbers at least as closely as sabermetricians. What's indisputable is that going back to 1928, September has been the worst performing month for the Dow, with more losses than any other month, as well as the record one-month drop of 30% from September 1931. Just about the only thing September lacks is a cataclysmic crash; October gets all the credit for those, with both 1929's and 1987's crashes happening in the later month.

Moreover, this time around seems like a prime candidate for a further fall. Stocks have had a terrible August, as fears of a double-dip recession have cooled off the macroeconomic outlook for the coming months. For high-growth companies like SodaStream (Nasdaq: SODA  ) and Travelzoo (Nasdaq: TZOO  ) , all it took for a major share-price smackdown was the suggestion that past growth rates might not persist into the foreseeable future. Meanwhile, problems across the Atlantic continue to plague financial institutions like Royal Bank of Scotland (NYSE: RBS  ) , and even tech giant Hewlett-Packard (NYSE: HPQ  ) has lost 20% of its value in August as it makes an about-face in its strategic direction.

Remember last year?
What many have so quickly forgotten, however, is that we were largely looking at exactly the same set of uncertainties last year at this time. Last August, the S&P 500 (INDEX: ^GSPC) dropped nearly 5% as many believed that the huge market rally that had been going on since March 2009 had to come to an end. Yet September proved to be the linchpin of a new rally, as the S&P jumped 9% on its way to highs that were more than 300 points above the index's August close.

It'd be nice if you could count on something as simple as seasonality to guide your investing. But for better or worse, even when a trend establishes itself over the long haul, whether it will hold true this time around is largely a matter of chance. And chance is no basis for a robust investing strategy.

Just buy good stocks
Rather than worrying about what the overall market is going to do, the best thing you can do right now is to look for stocks that will perform well no matter what happens to the major indexes. For many, the answer lies in low-volatility dividend stocks. Procter & Gamble (NYSE: PG  ) , Altria (NYSE: MO  ) , and General Mills (NYSE: GIS  ) all have a history of moving far less abruptly than the overall market even during turbulent times. They also have the advantage of strong dividend yields supported by solid businesses that produce consistent, dependable earnings. Moreover, all of them trade at modest valuations that give investors a margin of safety that higher-P/E stocks like SodaStream and Travelzoo lack -- so that even if the market hits a rough patch, you'll be better protected against a downturn.

On the other hand, if you feel confident the market is more worried than it should be, a more aggressive approach could produce bigger profits. Jumping in on badly beaten stocks can make you look like a genius if they rebound quickly. Just remember that even if you're right to take advantage of great values on former growth favorites, you won't necessarily get an immediate payoff.

Don't fear the reaper
September's record for losses may make the coming month seem scary. But no matter what happens, you can position yourself so you'll feel good about what the stock market brings. Just stick to your long-term guns and don't let yourself get caught up in the fears of the season.

If you want some more good ideas for smart dividend plays with less volatility, take a look at the Fool's special report, "13 High-Yielding Stocks to Buy Today." It's free and has some great picks for your consideration.

For Fool contributor Dan Caplinger, winter is coming. You can follow him on Twitter here. He doesn't own shares of the stocks mentioned in this article. The Motley Fool owns shares of Altria Group. Motley Fool newsletter services have recommended buying shares of Travelzoo, SodaStream International, and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy makes your spine tingle (in a good way!).

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