October is home to more than one frightening American (and, increasingly, global) tradition: Halloween. While that’s mostly about ghosts, ghouls and goblins, October also has a reputation as one of the scariest months for U.S. – and global – investors.

Over the past few decades, October month has seen some of the biggest stock market crashes of all time, like the Wall Street Panic (1907), the Great Depression (1929) and Black Monday (1987)… when the Dow dropped 22 percent in just 24 hours.

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

The “October effect”, as it’s known, has been spooking investors for decades. But, as with all horror stories, the truth is a bit more complicated – or, different.

For starters, regarding the three crashes mentioned above: Two of them started in September… it just took a few weeks for the market to react.

How the market has historically performed each month

If we crunch the data, October has seen more positive months than negative months. In fact, September is a far more dangerous month for U.S. investors, as the chart below shows.

Since 1950, S&P 500 returns in September have been negative 32 times (48 percent). And its average return was -0.1 percent. But so far this September, the S&P 500 is up 1.3 percent.

Meanwhile, October has been positive 42 times (63 percent) and negative just 25 times… with a much healthier average return of 1.1 percent.

The best-performing month on average has been December. It has seen positive returns 53 times (79 percent) since 1950, and negative returns just 14 times over that period… with an average return of 2.2 percent.

 

What about in Asia?

For the MSCI Asia ex Japan Index since 1987 (when the index was created), September has also been the worst-performing month, with average returns of -2.2 percent since 1987. So far this month, the index is 2.3 percent.

October was the second-worst performing month on average, with negative returns on 12 occasions and positive returns on 17 occasions (59 percent)… for an average return of -0.6 percent.

The best-performing month for the MSCI Asia ex Japan Index has been January, with an average return of 3.0 percent.

Singapore is no different

For Singapore’s Straits Times Index, once again, September has been the worst-performing month, as the chart shows. It has seen an average return of -1.8 percent since 1985, posting negative returns 18 times and positive returns just 14 times. So far this month, returns are -0.9 percent.

Meanwhile, October has returned an average of 0.2 percent, with positive returns 19 times and negative returns 13 times.

And December has been the best-performing month since 1985, with average returns of 2.7 percent.

So what does all this mean?

October has historically been one of the worst-performing months for the U.S. and Asia. But that doesn’t mean you should be spooked out of the market.

Fear and greed drive the market, as the old adage goes. And fear of stock market crashes in October is just one of the emotions that can lead to bad investment decisions.

Pulling out of the market altogether can be disastrous… not least because (mis)timing the market can mean missing out on the weeks when the market performs well. And as we’ve shown before, that can do enormous damage to a portfolio, because it means missing out on the magic of compounding.

So even though October has a reputation for stock market crashes… that doesn’t mean it is a good time to get out of the market.

But it is a good time to practice smart risk management by watching your stop loss levels carefully. Yes, you might miss out on some of the best weeks. But by missing out on a bigger correction, you’ll have done your returns a far bigger favour.