Why the month of October has bad business reputation

Why the month of October has bad business reputation

A monthly business column by Mercer Island financial adviser Bob Toomey.

  • Tuesday, October 22, 2019 1:30am
  • Business

October is here and for stock investors there is something about the month that can bring on feelings of anxiety and downright fear. Why? Because October has been historically associated with above average market volatility. Three major market crashes occurred in October — the 1929 and 1987 crashes and the beginning of the 2008 financial crisis. Market volatility in October is about 32 percent above the annual average of 19 percent.

So why does this “October effect” occur, particularly the higher volatility? I believe the phenomenon is primarily a technical one, not a fundamental one, and is caused by heavier institutional trading, call it the “recalibration theory.”

It goes something like this: investors — particularly institutional money managers — are now in the last quarter of the year and, in seeking to achieve the best performance for the full year, are making final assessments on the outlook for earnings, the economy, monetary policy, etc. and make material changes (i.e. “recalibrating”) their portfolio holdings to achieve the best performance. This results in heavier buy/sell volumes which I believe can lead to heightened volatility and noise in the market.

Should one worry about the “October phenomenon”? What about market volatility in general? The answer to that depends on one’s risk tolerance and financial goals.

It is important to remember that volatility, and the willingness to accept it, is an essential component to achieve higher returns. Why? Because higher return investments, such as stocks, are inherently more volatile than say, bonds or bank CDs. The long-term compound annual return for large cap stocks of about 10 percent is over two times that of bonds. Over time, it has been shown that one gets “paid” in the form of higher returns for the willingness to take on and stomach higher portfolio volatility. If one wants to feel or needs to be more secure owning bank CDs, one has to expect a much lower rate of return.

While we cannot completely eliminate portfolio volatility, there are ways in which we as financial planners can manage and reduce it. This is done largely through diversifying client assets across multiple asset classes such as U.S. stocks, international stocks, bonds, REITs and natural resources. This type of allocation helps us to target not only appropriate expected returns but also higher risk-adjusted return, which to me is the most important measure of return in wealth management.

So, we should not be overly concerned about the “October” effect and remember that it can be managed through proactive allocation and remaining disciplined to an investment and financial plan that aims to provide the optimal combination of return goals and risk management.

Bob Toomey, CFA/CFP, is vice president of research at S.R. Schill & Associates on Mercer Island.


In consideration of how we voice our opinions in the modern world, we’ve closed comments on our websites. We value the opinions of our readers and we encourage you to keep the conversation going.

Please feel free to share your story tips by emailing editor@issaquahreporter.com.

To share your opinion for publication, submit a letter through our website https://www.issaquahreporter.com/submit-letter/. Include your name, address and daytime phone number. (We’ll only publish your name and hometown.) We reserve the right to edit letters, but if you keep yours to 300 words or less, we won’t ask you to shorten it.

More in Business

Stock photo
Grocery store workers have right to wear Black Lives Matter buttons

National Labor Relations Board ruling against ban by Kroger-owned QFC, Fred Meyer

Eastside King County restaurant owners discuss challenges with U.S. Rep Suzan DelBene at Pomegranate Bistro in Redmond. (Photo credit: Cameron Sheppard/Sound Publishing)
Restaurant owners discuss labor difficulties with U.S Rep. Suzan DelBene

Experienced service and kitchen staff are reportedly hard to hire as food service reopens.

Dave and Buster's restaurant and entertainment venue looks to hire 130 people to staff its Bellevue venue, set to open in August. Photo courtesy Dave and Busters.
Dave and Buster’s hiring 130 for August opening in Bellevue

Dave and Buster’s restaurant and entertainment venue opens in downtown Bellevue on… Continue reading

Images of dishes from Issaquah’s Umi Cafe posted on the SMORS page. (Photo courtesy of Kristen Ho)
Facebook page promotes minority-owned restaurants across Puget Sound region

Miya Nazzaro used to be a member of Facebook pages that were… Continue reading

The Moe Vegan food truck serves meals at the city of Kent’s annual Community Thanksgiving Dinner on Nov. 21, 2020. Sound Publishing file photo
King County fire marshals offer regulatory relief to food trucks

39 fire authorities have reportedly agreed to standardize fire codes and inspections.

Cash Cards Unlimited partners, left: Nick Nugwynne, right: Cassius Marsh (photo credit: Cash Cards Unlimited)
Former Seahawks player Cassius Marsh cashes in on trading cards

Marsh and his friend open physical and online trading card store as collectibles boom amid pandemic.

Teaser
First large-scale, human composting facility in the world will open in Auburn

“It’s what nature meant us to do. We just do it faster.”

Whole Foods grocery store entrance (Shutterstock)
King County considers grocery store worker hazard pay for those in unincorporated areas

The King County Metropolitan Council will vote during its next meeting on… Continue reading

Screenshot
WA Democrats consider new tax on billionaires

Plan could raise $5 billion from fewer than 100 taxpayers. Detractors fear it could drive Washington’s wealthiest out of state.

Last summer, people took advantage of the outdoor dining along First Avenue between Gowe and Titus streets in downtown Kent. In Phase 2 of the governor’s reopening plan, which was announced Jan. 28, restaurants can reopen at a maximum 25% capacity and a limit of six people per table. Photo courtesy of Kent Downtown Partnership
Restaurant reprieve: State to relax some indoor restrictions

On Monday, area restaurants and certain entertainment venues may resume indoor service, the governor said.

Stock photo
State Senate passes $1.7 billion in unemployment insurance tax relief

Targets relief to the most affected businesses; helps low-wage workers by raising their benefits

Jason Wilson is a James Beard Award-winning chef and owner of The Lakehouse in Bellevue. Courtesy photo
James Beard Award winner wants to cook with you – virtually

Chef Jason Wilson can give customers an interactive dining experience in their own homes.