It’s that time in the cycle when we start getting a lot of negative headlines about share markets.

October certainly has a bad rep for market wobbles – or massive tantrums, as the case may be. The crash that ushered in the Great Depression happened in October 1929. And sure, there was ‘Black Monday’, a major fall in October 1987 (immortalised by photos of traders with 80s hairstyle looking very distressed).

And you know how it is, you do something a couple of times, then all of sudden you have a reputation for it. And so this poor old month gets a name like The October Effect, and makes everyone nervous.

September gave us a bit to be edgy about too. The Aussie equities market went down a few times, and is a bit less frothy than it has been so far this year. Other markets also had some ‘moments’.

There are a few notable things happening to give people pause for thought.

A few things on our minds

One is the demise of a Chinese company called Evergrande. It’s a colossally huge property developer in China, and has been lent a shit-ton of money by investors to finance its building activities. Anyway, it got into trouble recently, and there was a lot of concern about what it might mean for China and its economy.

Sure it’s a big company, but on its own, not big enough to tank the whole country. What people really worried about, was whether it’s the sign of a deeper issue; whether the government would bail out the company; and if it would make lending to all Chinese companies look … well … unattractive.

Anyway, Evergrande ended up working out a deal with the people it owes money to, and will hopefully sort itself out. It has, however, raised a lot of questions about the strength of China’s economic growth (which does, honestly, seem a little bit like it’s on steroids compared to the rest of the world. And we all know how long-term steroid use works out huh?).

There is also an issue with some commodity prices falling. Iron ore, Australia’s star export (among the stuff we dig up and ship away), has gone down a lot in recent weeks (like, it’s been halved). It’s a bad thing for us, because we make a ton of money from it. But it’s also a potential sign of economic weakness in the markets that buy it. And who’s our biggest buyer? Yep, you guessed it. Good old, steroid-pumping China. So. Yeah, there’s that.

Then here at home, and in many other countries, house prices have gone bananas, Sydney and Melbourne prices are generally bananas on any given day, but now they are absolutely at lunatic level. And the rest of the regions have got on board too. It’s no surprise that this would happen, when you pump so much stimulus into the economy and make interest rates so low.

But it makes people – like central bank and investment type people – very nervous. They care less about the fact you can’t afford a shoebox in a shit-heap, than about the fact that it makes the whole financial system a bit wobbly. The household-debt-to-income ratio is getting bigger every day as people sign up for sky-high mortgages. And there are worries about what happens if/when the music stops – will people be able to keep paying these giant debts?

There are rumblings about putting in place measures to rein in this type of lending – macroprudential restrictions, as they are known. But so far it’s just talk, and nothing has been announced. And then another week goes by with property records being smashed (and renters’ sense of hope along with it).

Don’t lose too much sleep

I am not here to give you doom and gloom! I want to give you some insights into why you are seeing a lot of negative headlines and what it means for your investing plans.

I certainly lean towards the belief that there will be some sort of a correction – i.e. the markets will go down in value. I think this because:

A) Markets are overheated – lots of cheap money in the system, and not many other places to put it, has pushed prices up way beyond their intrinsic value in a lot of cases.

B) Markets always go down at some point. It’s just the rule. They go up, they go down, they come back up and so on. It can be a bit of an emotional rollercoaster. I made this chart a while ago, and it’s worth reposting here:

So the this means two things for investors:

  • You have to take the ups with the downs. It’s about ‘time in the market, not timing the market‘. In other words, swings in value are just a fact of life. If you’re invested in shares, it should be for a long period (five years minimum, as a rule of thumb), so you have time to smooth out the volatility.
  • If you have any spare cash, you can buy the dip. When prices go down, you can buy up the stocks that have lost value in the drama of the correction, but are still good companies to own.

I’m sitting on a bit of cash at the moment, wondering when to invest it. Because I don’t have a crystal ball, I can’t predict if and when a correction is coming. If I wait it out too long, and it never comes, then I will have missed out on good market gains.

So I’m sort of hedging my bets with some ‘dollar cost averaging’. Which is a fancy way of saying that I’m drip feeding smaller amounts in, and hopefully a few of them will end up being good timing.

I think it’s akin to the saying ‘a broken clock is right twice a day’. If I throw some money into the market, surely at some point I’ll get a good deal.

So, Fierce Girls, if you already have investments in the sharemarket, just shut your eyes and ears til October is over. We’re in this for the long haul, and the market will recover – as it has every other time.

And if you are thinking about investing, then the next few months may offer some good bargains. Or they may not. I don’t know, and nor does anyone. That’s the pleasure and the pain of investing, I guess!