September Is Historically a Slow Month for Stocks. Here's Why That Shouldn't Matter to Investors

September usually isn't a great month for U.S. stocks. The S&P 500 (SNPINDEX: ^GSPC) has averaged a decline of roughly -0.6% in September since its inception, making it the only calendar month with a negative historical average.

That "September Effect" can be attributed to three factors. First, many money managers return from their summer breaks and rebalance their portfolios. By locking in their profits or dumping their losers to harvest tax losses before the year ends, those institutional investors can depress the broader market. Second, the Fed's interest rate decision in mid-September can exacerbate that selling pressure. Lastly, the widespread media coverage of the "September Effect" can drive more investors to pre-emptively trim their positions in late August to dodge that decline.

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It might be tempting to follow that trend, but investors who sell their stocks in September can miss out on some big long-term gains. Let's see why you should ignore the near-term noise.

It's a short-term strategy

The "September Effect" is similar to the idea that investors should "sell in May and go away." May is also a slower month for stocks, because investors often lock in their profits before the summer. But those investors also come back after the summer ends. September might also be a disappointing month, but that's just another temporary dip.

So if you're a long-term investor, it doesn't make any sense to worry about the market's seasonal swings in May and September. Instead, it's smarter to simply do nothing.

The S&P 500 has delivered an average annual total return of about 10% since its inception in 1957. It's generated a total return of 124% since the beginning of 2021. But if you had invested in the S&P 500 from Jan. 1 to Aug. 31 of every year, moved to cash for the last four months, then repeated that cycle the following year, you would have a total return of only 66%.

By skipping only September each year, you would have outperformed buy-and-hold investors, with a total return of 136% since the first day of 2021. But without a tax-advantaged account, the capital gains taxes for each of those five years would have offset most of those gains.

In other words, seasonal strategies usually reduce your long-term returns and increase your taxes. So instead of worrying about a potential market swoon in September, you should embrace it as an opportunity to buy more shares of your favorite stocks at lower prices.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.