Jean Chatzky: Bad month for the market?

Editor’s note: Jean Chatzky. the financial editor for NBC’s TODAY show, is an award-winning personal finance journalist, AARP’s personal finance ambassador and a contributing editor for Fortune magazine. Her eighth and most recent book is Money Rules: The Simple Path to Lifelong Security. Jean blogs at www.jeanchatzky.com and tweets @JeanChatzky. You can find her on LinkedIn and Facebook, too.

You’ve probably heard that September is notoriously harsh on the stock market.

It’s the one month that shows average declines over the past 20-, 50- and 100-year periods, according to a Wall Street Journal analysis.

In the more near term, though, it’s certainly not all doom and gloom: September has had a negative return for the month in eight out of the past 20 years, according to John Sweeney, the executive vice president of retirement and investing strategies at Fidelity Investments, who ran some data for me. Sounds bad, but six other months share that stat. And the median return, 1.83 percent, ranks the month No. 4 in terms of performance over the past two decades.

Smart investors know that while historical trends like these are an indication of future performance — that history tells us that the market always bounces back if you invest for the long haul — these sorts of ups and downs are par for the course when it comes to investing. Attempts to time the market will only get you in trouble.

So how should you react to headlines that tell you a crash is imminent?

1. Don’t try to time the market.

I said this above, but it’s worth repeating. As any seasoned investor knows, the market has more twists, turns, ups and downs than your average theme park roller coaster. Your best response is to stay the course; put a strategy in place and stick to it.

Especially in times of market volatility, the emotions of fear and greed intensify, testing the resolve of both individual and professional investors, says Tim Maurer, a wealth adviser and the director of personal finance for The Bam Alliance. But overwhelming evidence suggests that altering our long-term investment strategy to placate our short-term fears and expectations is a counterproductive pursuit.

Take a look, again, at history: Investors who pulled their money out of the market during the recession ended up locking in their losses; those who stayed the course saw their 401(k) balances nearly double between the market’s low point and the first quarter of this year, according to Fidelity research.

2. Take the opportunity to rebalance.

Headlines are hard to swallow, whether they’re about new market highs or an imminent crash. If you can’t stand sitting on your hands, take a look at your portfolio and evaluate whether it’s time to rebalance, says Maurer.

The chances are good that the market high/low du jour has caused imbalance in your portfolio, so taking from those asset classes that have expanded and shifting to those that have shrunk is a great way to buy low and sell high, he says.

3. Evaluate your level of risk.

If you simply can’t take the ride, you may be improperly allocated to your risk tolerance. Sure, you need to take some level of risk to generate a return, but you also need to be able to sleep at night. If you have a financial adviser, now may be the time to give him or her a call to confirm that your portfolio matches not just your age and retirement plans, but also the level of risk you can comfortably swallow, says Maurer.

There’s also nothing wrong with simply calling your adviser to say, ‘Hey, would you mind reminding me why we invested my portfolio this way and why we shouldn’t make any changes?’ A big part of an adviser’s job is simply keeping clients on track, explains Maurer.

4. Remember what belongs in equities in the first place.

That’s long-term savings, money you’ve set aside for retirement or other distance goals.

We would advise people to think about the time frame over which they are investing, and the appropriate asset class to use to achieve their goals over that time frame, says Sweeney. If you need the money sooner than five years, you probably shouldn’t be in stocks. If there’s a three-year goal, you’re thinking about a portfolio of bonds. And if you need this to pay your rent next month, it should be in money market funds.