Forget ghosts, goblins and ghouls -- the creature that frightens investors most in October is the bear. The bear market, that is. And given that many infamously dark days in Wall Street history -- including Black Thursday and not one, but two Black Mondays -- took place during this month, perhaps those folks are justified in being spooked. Or are they?

In the "What's Up, Alison?" segment from this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp do the research and reveal whether it's October, or some other month, that is most likely to do something gruesome to your portfolio. They also have some advice about mistakes not to make when it comes to investing in the stock market, plus some wisdom from billionaire investor Warren Buffett.

A full transcript follows the video.

This video was recorded on Oct. 16, 2018.

Robert Brokamp: So, Alison, what's up?

Alison Southwick: Well, Bro, we just had a heck of a fright. On Tuesday, the Dow dropped 800 points, the most since February. Do you remember that horrible day in February?

Brokamp: I do remember that horrible day.

Southwick: Do you really?

Brokamp: Yes, I do!

Southwick: OK, I don't. Anyway, because this is being taped in the past and you, dear listener, are in the future, I can't even begin to fathom what calamity has hence ensued. Cats and dogs living together. Total anarchy. But, should we be surprised? After all, it is October, which means the "October Effect" is in full force. Yes, the October Effect. Have we talked about this on this show before?

Brokamp: I don't know, but I will say that one of the first three articles I wrote for The Motley Fool back in 1999 was on this very topic, but let's hear your take on it.

Southwick: Here's my hot take on the October Effect. Do you remember whether it's a real thing or not? Because that's what we're going to talk about.

Brokamp: I know that some of the worst days for the stock market have happened in October.

Southwick: Oh, have they? So here we go. The October Effect is the idea that October is just a particularly bad month for the stock market. It's also known as the "Mark Twain" effect. Did you know that?

Brokamp: I didn't know that.

Southwick: It comes from the line in Mark Twain's Pudd'nhead Wilson, which means I get to break out my Southern lawyer voice.

Brokamp: Oh, I can't wait!

Southwick: "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."

Brokamp: Very good!

Southwick: Thank you! Basically, October is where it's particularly dangerous to speculate in stocks, as is every other month in the year. That's why they also call it the Mark Twain effect. But seriously, let's look at October! The Panic of 1907 happened in October.

Brokamp: I don't remember that one at all.

Southwick: That was a thing. Black Thursday and both Black Mondays happened in October in 1929 and 1987. The 2008 Great Recession kicked off in October. According to Zero Hedge, five out of the 10 worst days in the market happened in October.

But, downturns in 1987, 1990, 2001, and 2002 all bottomed out in October. In fact, the same day that the market just fell 800 points in October, it was the anniversary of when the Dow Jones bottomed out in 2002, having fallen 38.75% from its 2000 high.

Investopedia says that from a historical perspective, October has marked the end of more bear markets than it has acted as the beginning, so maybe October means it's actually a good thing to celebrate. Maybe we should take a look at some of the other months like, say, September!

Brokamp: Which is worse!

Southwick: It is! September is statistically the worst month for investors, according to many researchers, including Yardeni Research. September has had 47 down months compared to 39 up months since 1928 and on average investors lose 1% in September and the average monthly return in October is 0.4%. The best month, on average. Do you want to guess?

Brokamp: It's December, I think. December or January.

Southwick: It's actually July!

Brokamp: July!

Southwick: July is at 1.6% on average and December, you're right, is 1.4%.

Brokamp: There's an old adage called "sell in May and go away," where you're supposed to stay out of the market for a certain number of months. You do miss July, but the question was if I sell in May, when do I get back into the market? If was often Halloween when you get back in. It actually had some mixed results, but because you miss some of those really bad markets, "sell in May and go away" looked pretty good depending on what year you were looking at.

Southwick: Let's dig into some research about whether the October Effect is just a silly superstition or not, because a lot of people will say this is... whatever. Now some will go so far as to say there's something there, but it's mostly a self-fulfilling prophecy. We say it's an adage and so people actually follow it; therefore, people are investing and therefore the markets do fall.

I did see an article in the BBC where they spoke with Lily Fang. She's a professor at MIT and she blames the fact that all of us are coming off of our summer highs and when the reality of fall sets in, our bubbles burst. Essentially all of the people who spend their time obsessing over the markets go on holiday over the summer, and so they are delaying their reaction to market uncertainty until they get back to work in September and then they're like, "Oh, that's right! While I was on the beach drinking mai tais, everything's awful now."

So Dr. Fang and her colleagues have tested their thesis by looking at differences in school holidays in 47 countries and they found that the returns are, on average, 1% lower in the months after a major school holiday. Their basic conclusion is that there is some market inefficiency because many professional investors are just plain absent from the market and on a yacht, I assume. I don't know what they do with their time.

Writing for The Wall Street Journal, Jason Zweig blames the "availability bias," and that's the human tendency to judge how likely an event is by how easily we can recall vivid examples of it. So the horrific losses of October 20th, 2008 are hard to forget. Any day with the word "black" in front of it is kind of hard to forget; whereas, the milder gains of 7% in October of 2015 and 11% in 2011 are hard to remember.

Zweig also pointed to research that fall just generally makes us sadder and less optimistic, so average returns on U.S. treasuries appear to be higher in fall than in spring, suggesting that investors are seeking safety in darker months. Stock analysts' earnings forecasts are less optimistic in fall and winter than they are in summer and spring.

All that's interesting, but what should we do about it whether there is an effect or not? I'm going to go to Warren Buffett for his advice.

Brokamp: Sounds good to me.

Southwick: Sounds like a good guy. Now I'm going to offer some of his advice, all of which Motley Fool Answers listeners have heard before, but it's worth reminding you of because, again, you're in the future and I have no idea what hellscape of financial disintegration you are currently living in five days from the taping of this episode. It could be bad, Rick. We don't know.

The first piece of Warren Buffett advice is that the most important quality for an investor is temperament, not intellect. We here, at The Motley Fool, often preach how you need to be able to ride out the storm and keep calm, and carry on, and that good stuff; and if an 800-point drop in the Dow is keeping you from sleeping, then maybe you need to pull back your exposure in the market. Did I get that advice right?

Brokamp: That's pretty good.

Southwick: And, of course, there's Warren Buffett's advice of being fearful when others are greedy and to be greedy only when others are fearful. We here, at Motley Fool Answers, don't necessarily like the idea of timing the market, but I know there are some analysts here at The Motley Fool who maybe have stocks on their watchlist that wouldn't mind getting it a little bit on sale.

And my final piece of Warren Buffett advice is that the stock market is a device for transferring money from the impatient to the patient, by which we mean, of course, that we don't want you to be buying and selling stocks and always in the month of October and the patient investor holds on for the long term because, after all, in the long term the stock market tends to go up and to the right, which we like.

Brokamp: That's right.

Southwick: Do you want to offer any other additional advice?

Brokamp: No.

Southwick: OK. So let's go back to that Pudd'nhead Wilson quote. "October. That is one of the peculiarly dangerous months to speculate in stocks." Yeah, I would agree. It's always kind of a bad month to speculate in stocks, by which I mean, of course, making short-term bets and day trading, but long-term, bottoms-up investing in companies you believe in; well, that's always in season. And that, Bro, is what's up!

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