The month of October strikes fear into the hearts of many Wall Street veterans – and for good reason. Over the past 123 years, 7 of the 10 worst days in U.S. stock market history have occurred in this seemingly alarming 31-day period.

But there is nothing supernatural about these October fears: they are remnants of the 19th century. agricultural cycle of financing. During the 1800s, farmers harvested their crops and sent them to market in the fall, paying for the operation with large payments from their local banks. Those banks, in turn, withdrew funds from New York’s larger banks and trusts to replenish their reserves, making Wall Street’s financial markets particularly vulnerable to panic. Even after the United States transitioned to an industrial economy and reestablished its central banking system in the early 1900s, memories of past Octobers seem to have made investors habitually panic. October 2022 may just be the latest manifestation.

Closet Tactical Asset Allocation Costs

Panic is the mortal enemy of long-term investors, especially in volatile markets, but that doesn’t mean we should sit idly by in the face of another October scare. at times like this the late David Swensenobservation in his class Unconventional success should remember:

“Perhaps the most common form of market timing occurs not in the form of obvious bets for and against asset classes, but in the form of passive deviation from the target allocation.”

Many investors fail to heed this advice at the very times when it is most valuable. Instead, they let their profits ride in bull markets and then freeze when the markets dip into bear territory. This is precisely the insidious form of distribution of tactical assets that Swensen refers to.

But history shows that this is never wise. For every scientist who successfully navigates treacherous macroeconomic currents, many more suffer financial ruin trying. Failure to rebalance may not be devastating, but will almost certainly reduce long-term profitability.


Dow Jones industrial index: 10 worst trading days:

Date One-day slump
October 19, 1987 -22.6%
October 28, 1929 -12.8%
October 29, 1929 -11.7%
December 18, 1899 -8.7%
March 14, 1907 -8.2%
October 26, 1987 -8%
October 15, 2008 -7.9%
October 18, 1937 -7.8%
December 1, 2008 -7.7%
October 8, 2008 -7.3%
Source: Dividend.com

So why is this tactical asset allocation so common among pension funds, foundations, endowments and other institutional investors? Because many are advised by non-discretionary investment advisers who are not authorized to rebalance portfolios, they simply do not advise their clients to do so. But trustees need to take the initiative and make sure they do the rebalancing at times like this.

Financial Market History Book Covers: Reflections on the Past for Today's Investors

Short term pain and long term gain

U Principles, Ray Dalio advises readers to seek out painful feedback so they can confront their flaws and gain the insight they need to overcome them. He often repeats the mantra: Pain + Reflection = Progress. Economic events follow a similar principle. Today’s economic pain is likely to intensify in the coming months, but that doesn’t mean we’re suffering needlessly. The mistakes of the past must be corrected. High inflation has persisted for far too long, and the restoration of price stability is absolutely necessary to ensure future economic prosperity. We learned this in the 1980s. There’s no need to relearn it in the 2020s. We must break the backbone of inflation, and while it will be painful, it will be worth it.

Today’s difficulties will not be in vain. After the recession of 1981 and 1982, the US economy came back stronger. Fueled by extraordinary technological innovation, the country has enjoyed two decades of economic prosperity.

There have been many financial scares over the past two and a half years. We may see more this October and in the months to come. But when it passes, we will breathe a sigh of relief again. In the meantime, we need to steel our nerves, balance our portfolios and trust that the pain we suffer now will be rewarded in the future.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/Đorđe Milutinović


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Mark J. Higgins, CFA, CFP

Mark J. Higgins, CFA, CFP is an experienced investment advisor with over a decade of experience serving large institutional investors such as endowments, foundations, public pension plans and corporate operating reserves. He is also an avid financial historian and is publishing a book on the complete history of the US financial system in early 2023 with Greenleaf Book Group. Higgins earned an MBA from the Darden School of Business and graduated Phi Beta Kappa from Georgetown University with a BA in English and Psychology. He is also a CFA charter holder and a CFP specialist.

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