Ah, September!
Beautiful days. Cool nights. Crisp and refreshing.
Kids are back in school. Daily routines are starting to fall into place. Normalcy.
What is not to like? Unless you are one of those people who prefer that your investment values rise instead of fall. Then, at least historically, September may not be your month.
The truth is that September has been the worst month of the year for traders over the last 70 years. It is the only month of the year where the long-term average return is negative.
That level of pessimism maintained over such a long period of time is incredible, especially when you consider the long-term upward trajectory of the stock market over that time period.
These kinds of persistent seasonal quirks in the financial markets are fascinating to me, and that creates a dangerous temptation.
The temptation, of course, is to completely abandon our long-term investment philosophy and recommend that all of our clients sell all of their stock holdings on August 31 every year and buy them back on October 1. That strategy sure seems logically appealing, doesn’t it?
However, overconfidence in the illusion that the financial markets can be accurately timed because past patterns will perpetuate indefinitely can lead to a case of what I call compoundus interruptus.
As long-term investors, the most valuable assets we have are time and compounding. Take either one of those assets away from us and our long-term investment returns are unlikely to meet our objectives.
Compoundus interruptus creates a delusion in a long-term investor that abandoning either time or compounding is in their best interest. Typically, this delusion is a result of very convincing temptations such as historical market patterns or current hyperbolic headlines.
The truth is neither of these temptations serve a long-term investors’ best interest assuming their current portfolio is properly aligned with their long-term goals. Shorter-term goals need to be funded by shorter-term investment assets due to a lack of time. Longer-term goals should be funded with longer-term investment assets that – while much more volatile over shorter periods of time like September – still have abundant time to compound.
Therefore, as tempting as it may be to recommend selling all of our clients’ stocks before September starts, we will be avoiding compoundus interruptus by sticking to our long-term investment strategy which permits our clients’ long-term assets to continue compounding over long periods of time.
Have a great September!
Quote of the week: Charlie Munger: “The first rule of compounding: never interrupt it unnecessarily.”
Graphic Credit: iStock-1614212698
