Historically, August and September have been among the most challenging months of the year for stock investors. While this year may buck the trend, it would be beneficial to have a plan in place if the stock market enters a correction before the end of September.
Investopedia calls it the September Effect. The article notes that from 1928 through 2023, the S&P 500 has had an average negative return for the month. September is the only month of the year with a negative average return.
A MarketWatch article noted that August is also historically a tough month for stocks, especially large-cap growth stocks.
No one can predict whether the markets will follow history and turn down at some point in August or September. However, it might be reasonable to assume that if stocks turn down, investors may consider the September Effect and start selling to avoid further losses. That selling could lead to a steeper decline.
While you may be a bit more observant about a market correction during the next few weeks, don’t think of any downturn as a time to sell. Selling at lower prices locks in losses, or at least reduces gains. Buying during a downturn makes you that much richer when the market recovers. And it has always recovered to set new record highs eventually.
The plan to “buy when investors are fearful” works exceptionally well with higher-yield investments. A lower share price means a higher current yield. So if you buy shares “on sale,” you grow your portfolio income at a faster rate. Then, when the market recovers, you pick up extra gains in your portfolio.
If you want a high-yield investment to put on watch to buy during a market correction, consider FS Credit Opportunities Corp. (FSCO). FSCO is a closed-end fund, which means the share price can trade at significant discounts or premiums to the net asset value (NAV).
FSCO is especially interesting because the fund’s NAV has historically been very stable. But that hasn’t stopped the share price from selling off during market downturns. Check out this year-to-date chart of the NAV and market price of FSCO:
The fund went seriously on sale during the March-April bear market, but no real value was lost if you look at the NAV. It would have been great to grab some FSCO shares in early April. As a CEF, FSCO pays an attractive 11% yield.
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