October plunges can reward brave investors

NEW YORK — The bloodletting in the stock market the past month is an awful reminder of why October is a hall-of-famer when it comes to crashes.

For investors, October sits like a sharp curve in the road that must be approached with care. In good years, investors might grow nervous but ultimately pass safely, while in a year like 2008, October can be treacherous. But the month that brought the 1929 crash and 1987's Black Monday can also help change the stock market's fortunes.

Wall Street's latest plunge gave this October the dubious distinction as the worst of any month in 21 years for the Standard & Poor's 500 index, the market barometer professionals rely on and a yardstick for many mutual funds. The index fell by a stunning 16.9 percent. But while that's bad, many investors have seen worse — in October 1987, the S&P 500 logged a 21.8 percent drop.

And it has been 79 years since the torrent of selling that began on Thursday, Oct. 24, 1929, and intensified the next week to bring about the crash that helped kick off the Great Depression. The S&P fell 19.9 percent that month.

Despite its reputation as a troublemaker, October can pay huge rewards for those who survive the occasional fires. It has launched the reversal of 11 bear markets since World War II, according to the Stock Trader's Almanac.

It's not easy to stick around after a scare, but those who do can buy stocks cheap and then score some very nice gains over time.

"This is the buying opportunity of someone's lifetime," said Joe Barrato, director of investment strategy at Arrow Funds.

He notes that while it's impossible to know whether the market formed a bottom when it hit its recent low on Oct. 10, as some market watchers speculate, investors should be aware that historically, the run-up afterward can be huge. Since 1926, the worst 12-month periods for the market — not just the worst calendar years — have been followed by enormous advances. The average return in one year after the market has logged its most gruesome runs is 35.2 percent.

By comparison, Barrato notes that those investors who shifted into bonds after the most painful stock market routs saw an average return of 5.4 percent a year later.

"People sell at the bottoms and buy at the tops and that's why they consistently underperform," he said.

Investors might be less prone to panic if they consider that many mutual funds are busy doing end-of-the-year housekeeping that, in bad years like this one, can include heavy selling. That's because funds' fiscal years end on Oct. 31. To avoid a tax hit for investors and to dress up their portfolios, many funds dump losing investments.

Jeffrey Hirsch, editor-in-chief of the "Stock Trader's Almanac," is optimistic about the market's prospects. But he said investors' fear of October can itself cause selling.

"There has been a self-fulfilling prophecy," he said, adding "it sits at this crossroads of seasonality, the mutual fund deadlines and the portfolio restructuring."