Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
What is The September Effect and What Might It Mean for Your Portfolio?
Ruby Layram
10th Sep 2024
September is the month when we say goodbye to the summer sun, pack away our holiday gear, and brace ourselves for the back-to-school rush. But while most of us are preoccupied with returning to routine, there’s something else brewing in the financial world: the September Effect.
The September Effect is the recurring trend that sees the stock market perform worse in September compared to other months of the year. But why does this happen, and what could it mean for your portfolio?
Understanding the September Effect could be crucial for making informed decisions over the next few weeks. In this guide, we will explain what The September Effect is, why it happens and how to navigate the market during September.
- What is the ‘September Effect’ in the stock market?
- Why does the stock market perform worse during September?
- Is the September Effect Real?
- How might the September Effect impact your investments?
- How to protect your portfolio from the September Effect
What is the ‘September Effect’ in the stock market?
The September Effect is a term that describes the tendency for stock markets to experience a bit of a rough patch during September.
Essentially, the idea is that stocks tend to drop more in September than in any other month, leading to losses for investors who aren’t prepared.
This phenomenon isn’t something new—it’s been whirling around the market for decades. But what makes it interesting is that there’s no single, universally accepted reason behind it.
Some blame it on investor psychology, while others put it down to to specific market events that occur at this time of year. Whatever the cause, it’s something that investors around the globe keep a close eye on.
The good news? Knowing about the September Effect allows you to take informed steps to protect your investments.
Why does the stock market perform worse during September?
The big question on every investor’s mind is: Why does the stock market perform worse during September?
This is where things get a bit confusing. There is no definitive answer to the question! However, there are a lot of possible explanations.
- Investor psychology: After the summer holidays, investors might be returning to the market with a more risk-averse outlook, especially as they prepare for the end of the financial year. This cautiousness could lead to selling off high-risk assets which could cause a dip.
- Tax-loss selling: Some investors might begin tax-loss harvesting in anticipation of the financial year-end. This is where they sell off losing investments to offset gains made earlier in the year.
- School fees: It is thought that some investors may sell considerable chunks of their portfolio to cover their children’s school fees. Forking out £9000 a year for Uni would certainly sway the markets!
- Mutual fund activity: September is the final month of the fiscal year for many mutual funds. Fund managers might be selling off underperforming stocks to clean up their portfolios, adding to the downward pressure on the market.
- Seasonal trends: September is a transitional period—not just in weather but also in the economy. Businesses might be adjusting forecasts, consumers might reining in their spending after the summer, and these small changes collectively could impact the market.
- Historical performance: Sometimes, market patterns become self-fulfilling prophecies. If enough investors believe that September is a bad month for stocks, they might start selling off their investments at the start of the month, leading to the very dip they’re trying to avoid!
Is the September Effect Real?
Despite the September Effect rolling around each year, many investors question whether it is actually real.
If you do a bit of digging, there is evidence to suggest that September has indeed been a weaker month for stock markets, particularly for our friends in the U.S.
For example, if we look at the Dow Jones Industrial Average over the last century, September has shown lower returns compared to other months.
However, this trend isn’t consistent every single year. There have been plenty of Septembers where markets have performed perfectly fine—or even very well!
So, it seems that the September Effect may not be set in stone.
The most famous September for the US stock market was that of 2008 when the market plummeted following the collapse of the Lehman Brothers investment bank. This was certainly a bad month for the markets. But, large US banks don’t collapse every year!
How might the September Effect impact your investments?
So, what does all of this mean for your portfolio? Should you be selling off everything and waiting for September to end? I don’t think so!
The September Effect should be seen as a trend rather than a rule. It’s something to be aware of, but not something to panic over.
If anything, it presents an opportunity for savvy investors to find undervalued stocks and buy the dip. The impact of the potential September Effect will largely depend on your strategy.
If you’re a long-term investor, the September Effect will just be a blip of short-term volatility. You will probably recover any losses over time.
However, for short-term investors, September might come with a bit more risk. If the market does dip, it could be an opportunity to buy low and sell high. But timing the market is difficult and there is no guarantee that prices will recover.
How to protect your portfolio from the September Effect
In my opinion, the September Effect isn’t really something to lose sleep over. However, it’s always good to know how to protect our portfolio during times of volatility.
Buy the dip!
One of the most straightforward strategies is to take advantage of any potential dips.
If you believe that a stock has promise but has dropped in price due to September jitters, this could be an excellent buying opportunity. The key is to do your research and make sure you’re investing in quality assets.
Diversify
Diversification is one of the golden rules of investing, and it’s particularly relevant when facing potential market volatility.
Spread your investments across different sectors, asset classes, and even geographic regions to reduce your overall risk. This way, you won’t be overly exposed to one part of the market.
Focus on high-demand sectors
Certain sectors are more resilient to market fluctuations than others. Some examples include, healthcare, food, and utilities. These areas tend to be more stable because there is always a demand for these products – even when consumer spending is down!
Invest in inflation hedges
Inflation hedges, such as gold and commodities, can be a good addition to your portfolio during uncertain times. These assets tend to perform well when inflation is on the rise or when other parts of the market are underperforming.
While it’s true that September has historically been a weaker month for stocks, it’s not a reason to panic. Instead, think of it as an opportunity to fine-tune your investment strategy and make informed decisions.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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