Examining the Numbers

For all Octobers since 1896, when  the Dow Jones Industrial Average was created, the standard deviation of the Dow's daily changes has been 1.44%. That compares to 1.05% for all other months. 

There are many theories as to why volatility spikes in October.  One suggests that after a summer of vacations, stock market analysts and traders return after Labor Day and begin to make major trades. This causes an uptick in volatility that spikes a month later, in October. Another theory suggests that volatility is influenced by the US Government, whose fiscal year begins on October 1. Perhaps it is aligned with changes in the Chairman of the Federal Reserve, whose term ends every four years in January, and whose replacement is often named in October. A final theory suggests that it is simply a reflection of companies reporting their 3rd quarter returns.

Understanding & Preparing for More Volatility 

Whatever the reason, it's important to understand that October's above-average volatility doesn't necessarily mean below-average returns. Volatility is a sudden, sharp movement in either direction, and usually in both. Though many of us associate October with Black Monday (October 19, 1987, when stock markets around the world crashed) or even Black Tuesday (October 29, 1929, the start of the Great Depression), October also marks the beginning of a number of bull markets. Eight of the 35 bull markets since 1900 started in October; that's twice as many as any of the 11 other months. 

So how should you prepare for a potentially volatile October? Probably the best way is to resolve not to panic if and when there is a spike in volatility.  If you look back at the history of the stock market, one thing becomes clear. Even the biggest, scariest drops will at some point in the future be mere blips on the chart.  Ten years ago, we were in a real crisis of historic proportions, yet with hindsight it's evident that selling into that decline, even early on, was a mistake for long-term investors.