Explanations for the September Effect
The September Effect is a market anomaly without a concrete explanation. Many theories exist for why it happens, with one of the more plausible being that September is when investors are interested in tax loss harvesting start selling losing positions. This selling creates downward pressure on stock prices.
Another theory involves institutional investors that rebalance their portfolios every quarter. Since September is the end of the third quarter, it's when hedge funds and mutual funds that need to reduce their stock positions will sell off holdings to rebalance. However, if this theory was accurate, it would make sense to see similar results at the end of the other three quarters. March, June, and December all have positive average returns, casting doubt on this theory.
It's also possible that the September Effect is related to corporate profit-taking to bolster their balance sheets or even parents selling stocks to pay for back-to-school shopping and college tuition. Perhaps most likely, the September Effect could just be random chance that evens itself out over the next 100 years.
Should you invest differently in September?
The September Effect is an interesting piece of investing trivia, but it's not something that should change how you invest in stocks. You can't rely on it to predict what will happen in September. After all, even if that month has been the worst on average, stock prices have only declined about 55% of the time -- barely more than the odds of a coin flip.
Monthly returns also shouldn't be a major concern for long-term investors. When you're investing in companies and funds that you plan to hold for five to 10 years or longer, then a potential dip in September isn't going to make or break your portfolio. Short-term price movements are important for traders, but that's not an approach The Motley Fool recommends.
Look at it like this: You probably wouldn't pass on investing in a stock you love just because it's September. A great company is a great company, no matter when you buy it. Invest the same way in September that you do throughout the rest of the year.
