Market Perspective
  •  10/18/2021

October Has a Bad Rap — What’s the Deal with “The October Effect”?

By Jason Broder

The Key to Investment Success Is Time, Not Timing

New York Yankees legend Yogi Berra once said, “It's tough to make predictions, especially about the future.” That is true for any baseball game, and accurate when it comes to investing.  As a result, when it comes to achieving your long-term financial goals, time—not timing, is the secret recipe.

With October underway, it’s hard not to be reminded of the month’s ominous history that has coined the term the “October Effect”:

  • October 1929: the biggest crash in market history, bringing the Roaring 20s to a close with a 25% drop over two days1
  • October 1987: the largest single-day plunge—more than 20%—in a day that became known as Black Monday2
  • October 2002: the trough of the dot-com bust, down more than 75% from its March peak3
  • October 2008: the height of the sub-prime mortgage crisis panic4

It’s important to tune out the doom and gloom of the month, and avoid making rash portfolio allocation decisions, because the October Effect is just a perception rather than a reality that market corrections are more likely to take place in one month over another.

Making short-term predictions about the future—or responding to market volatility by paring back—can actually have a more dramatic impact on your returns than staying invested through highs and lows.

In fact, missing some of the best days of the market can be one of the most expensive investing mistakes.  Over the past 15 years, if you missed just ten of the best-performing days of the market, you missed out on a 149% return, or a 6% annualized return. And, if you were not invested during the 30 best days, you may be worse off than investing at all:

Responding to market volatility by paring back equity exposure, while tempting, can dramatically impact long-term returns.

Staying invested through turbulent times is the key to achieving long-term financial goals.  While sudden market corrections can cause short-term pain, finding investments that help mitigate the risk involved in market participation can help by providing a better risk-adjusted return. Risk-managed asset classes like structured investments are one great example to explore because they enable investors to protect against market downside while maintaining upside exposure.

A structured investment starts with an ordinary investment, like a stock, an index, or an exchange-traded fund (ETF), that serves as the reference asset, known as the underlier.  Instead of being reliant just on the ups and downs of the reference holding, the structured investment is able to tailor the exposure around specific risk tolerance levels. For example, a structured investment can embed protection against severe market shocks—like a 10%, 15%, or 20% loss—helping avoid some of the loss that may be incurred if invested solely in the reference asset.

Structured investments come in a wide variety of options with different terms and conditions and are designed to be held until maturity. There’s one for almost any market outlook or investment goal, giving investors the chance to stay in the market for the long term, instead of playing the riskier game of timing the market. The product’s offering document clearly outlines all you need to know on terms, fees, and any risk considerations—like issuer credit, limits on upside participation, potential for loss, and limited liquidity—so just make sure to read the fine print.

While making predictions about individual companies is tough, exploring alternative ways to invest can be a game changer for risk mitigation.

As for October, it has a bad rap that isn’t really warranted, and what’s more valuable to note is that historical market crashes have been followed by subsequent bull market rallies. The lesson? Stay invested, for the long term. That’s the key to investing success.

1S&P Dow Jones Indices. “DJIA Daily Performance History,” Download DJIA Daily Performance History. Accessed September 18, 2021.
2The Motley Fool. “The Biggest Stock Market Crashes in History.” Accessed September 18, 2021.
3Corporate Financial Institute. “Dotcom Bubble.” Accessed September 18, 2021.
4CNN Money. Special Report Issue #2: America’s Money Crisis. “Stocks Slump Despite Bank Rescue.” Accessed September 18, 2021.

©2021 SIMON Markets LLC. All Rights Reserved. | 2021.10
This is not intended to be an offer or solicitation to purchase or sell any security or to employ a specific investment strategy. Securities products and services offered by SIMON Markets LLC, a broker-dealer registered with the U.S. Securities and Exchange Commission, a member of FINRA / SIPC. Annuities and insurance services provided by SIMON Annuities and Insurance Services LLC. Please visit www.simon.io for complete disclosures, including terms of use and privacy policy.

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