US congressman Ted Cruz has hit the headlines for reading Dr Seuss’ Green Eggs & Ham during a filibuster of a US budget bill.
And so in the spirit of re-telling old yarns, here’s another story you’ve probably heard before. According to the Financial Times:
‘The US government could start to run short of funds to meet its obligations by October 17, said Jack Lew, the Treasury secretary, unless Congress votes to lift the debt ceiling before then.‘
As old yarns go, this one is about as tedious as it gets.
But all you need to know is that you shouldn’t let boring old yarns like this divert you from your investing goals…
Take for instance the guff about the stock market in the month of October.
The old story is that October is a terrible month to invest…that the market is certain to crash and you’ll lose all your money.
We understand where folks get this doom and gloom idea. The famous 1987 stock market crash happened in October 1987. And a big chunk of the 2008 stock market crash happened in October 2008.
But if you look at the stock market’s record over the last 11 years you’ll find the truth about October isn’t as scary as bearish commentators and most in the mainstream would have you think…
The ‘Chart of Octobers’
We remember for as long as we’ve been interested in financial markets that October is supposed to be a horrific month for investors.
But how does the tale stack up to reality? Not very well, as the following chart shows:
Data Source: Yahoo! Finance
The blue bars show the point gains or losses in the month of October for the S&P/ASX 200 going back to the creation of the index in 2001.
As you can see, the 2008 crunch took a big chunk of points off the index. But as you can also see, based on this 11 year period, 2008 is also an extreme outlier.
Now, that doesn’t mean a crash of that proportion can’t happen again (as you’ll hear in the next couple of days from our old pal Dan Denning, he suggests such a crash is ‘unavoidable‘), but there’s also no guarantee it will happen next month or in October 2014.
In fact, our bet remains that you won’t see a major stock market crash until after the Australian share market takes out the high above 7,000 points in 2015.
But getting back to the ‘Chart of Octobers’, the chart shows that the record for October isn’t that bad. On a net points basis, the index is actually up 317 points…despite the 618 point drop in October 2008.
Putting a Line Through the Market
However, this doesn’t mean everything is rosy. As you know, the share market is in an extremely volatile state. It could lose 200 points or more in a flash. Remember, the Aussie index lost nearly 600 points during May and June of this year.
But now that the index has moved into and above the key level around 5,200 points we’re prepared to bet the market won’t fall back below that level again this year:
It’s a big call. And we know we’re sure to take some flak for saying it. But these are the kind of calls you have to make as an investor.
Take the period from May to June this year. We had held a bullish view right up until that time. We felt that low interest rates and the surge into dividend stocks would continue to boost the market, and that companies would use this to their advantage by boosting payout ratios.
But when interest rates started to rise in May, investors didn’t like it and so they sold stocks. Even so, despite the fall, we stood firm in our view that it was a short-term event.
It was the right decision.
We don’t always get it right, but this time we did. Stocks have recovered from all their May and June losses and are now trading above where they were in May.
And that’s the thing. When you’re making big investment decisions it’s important not to be rash. One false move can have a huge impact on your savings.
Stick to Your Investing Plan
This is why we suggest that you ignore most of the peripheral stuff. Rather than focus on things you can’t control (such as central bank money printing and the US debt ceiling), focus on things you can control such as picking quality stocks.
As we said at the top of this letter, we can’t guarantee we’re right. As much as we’ve screeched and warbled about stocks going up and the market heading towards 7,000 points, there’s always the chance we’ll get it wrong.
But so far our analysis has been pretty much spot on. And if you’ve followed our advice you should have bagged good returns by betting on dividend stocks and small-cap growth stocks.
If you want to make big returns you’ve got to take a view and build your strategy around it. That doesn’t mean sticking your head in the sand and ignoring everything else entirely.
But if you decide to change direction with your investments, make sure you don’t do it on a whim. Investors who sold in May and June fearing a complete collapse are doubtless regretting that decision as stocks continue to climb.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: Are You Waiting for a Real Estate Crash That Isn’t Going to Come?
Daily Reckoning: How Much Juice can Australian Property Have Left?
Money Morning: Why the Next Commodities Boom Could Take Place in a Science Lab
Pursuit of Happiness: The Pope Has Got This One Wrong about Money
