Visualizing Stock Market Risk: 7/1926 to 6/2015

Visualizing Stock Market Risk: 7/1926 to 6/2015

August 28, 2015 Uncategorized

Last updated on January 18th, 2017 at 03:01 pm

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How crazy is current market action?

Not that crazy.

…and if you lived through 2008, definitely not that crazy.

Seeing a -3%+ or a +3% observation is roughly a 1/100 event, or ~ 2.5 times a year. Obviously, return events are not independent and volatility tends to cluster, but the numbers above establish a basic starting point for discussions about daily return action.

Here we present daily total return data from the Ken French library:

  • Value-weight return of all CRSP firms incorporated in the US and listed on the NYSE, AMEX, or NASDAQ that have a CRSP share code of 10 or 11 (essentially ordinary common shares).

There are 23,509 daily return in total.

Daily Return Distribution:

Microsoft Excel - Histogram of CRSP Daily VW Returns.xlsm_2015-08-27_14-28-19
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Here are the specific stats:

Bucket Observations Frequency Cumulative
Less than -5.00% 59 0.25% 0.25%
-4.50% 20 0.09% 0.34%
-4.00% 31 0.13% 0.47%
-3.50% 46 0.20% 0.66%
-3.00% 85 0.36% 1.03%
-2.50% 164 0.70% 1.72%
-2.00% 289 1.23% 2.95%
-1.50% 547 2.33% 5.28%
-1.00% 1154 4.91% 10.19%
-0.50% 2566 10.91% 21.10%
0.00% 5599 23.82% 44.92%
0.50% 7048 29.98% 74.90%
1.00% 3416 14.53% 89.43%
1.50% 1331 5.66% 95.09%
2.00% 563 2.39% 97.49%
2.50% 237 1.01% 98.49%
3.00% 115 0.49% 98.98%
3.50% 69 0.29% 99.28%
4.00% 61 0.26% 99.54%
4.50% 37 0.16% 99.69%
5.00% 19 0.08% 99.77%
More than 5.00% 53 0.23% 100.00%

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

How about drawdowns?

Daily returns are one thing–let’s review the top 40 stock market drawdowns over the past 90+ years.

  • VW CRSP = Value-weight CRSP universe of AMEX, NYSE, and Nasdaq stocks (Basically S&P 500).
  • LTR = 10-Year Total Return

Monthly returns, gross of fees, total returns (e.g., including dividends).

Rank Date Start Date End VW_CRSP LTR
1 8/30/1929 6/30/1932 -83.67% 14.29%
2 10/31/2007 2/28/2009 -50.37% 20.55%
3 2/27/1937 3/31/1938 -49.18% 0.22%
4 12/31/1972 9/30/1974 -46.46% -6.05%
5 8/31/2000 9/30/2002 -45.09% 33.46%
6 11/30/1968 6/30/1970 -33.56% -8.02%
7 8/31/1987 11/30/1987 -29.91% 2.55%
8 8/31/1932 2/28/1933 -28.47% 0.88%
9 4/30/1940 4/30/1942 -27.62% 6.99%
10 5/31/1946 5/29/1947 -23.85% 1.04%
11 12/31/1961 6/30/1962 -23.06% 3.97%
12 1/31/1934 7/31/1934 -18.34% 6.59%
13 8/31/1933 10/31/1933 -17.95% -0.68%
14 4/30/2011 9/30/2011 -17.71% 9.44%
15 6/30/1998 8/31/1998 -17.39% 3.70%
16 5/31/1990 10/31/1990 -16.97% 3.59%
17 11/30/1980 7/31/1982 -16.62% 17.87%
18 1/31/1966 9/30/1966 -15.45% -0.18%
19 7/31/1957 12/31/1957 -14.95% 8.86%
20 12/31/1938 4/29/1939 -14.33% 3.87%
21 4/30/2010 6/30/2010 -12.99% 4.68%
22 1/31/1980 3/31/1980 -11.98% -7.67%
23 8/31/1978 10/31/1978 -11.95% -3.04%
24 5/28/1948 11/30/1948 -10.88% -0.08%
25 6/30/1983 5/31/1984 -10.83% -2.59%
26 3/31/2000 5/31/2000 -9.64% -0.10%
27 12/31/1976 2/28/1978 -9.33% -1.45%
28 7/31/1956 2/28/1957 -8.37% -0.65%
29 8/31/1986 9/30/1986 -8.15% -2.07%
30 3/31/1936 4/30/1936 -8.02% 0.35%
31 12/31/1959 10/31/1960 -7.97% 11.44%
32 12/31/1947 2/28/1948 -7.94% 0.66%
33 6/30/1943 11/30/1943 -7.76% 0.36%
34 1/31/1994 6/30/1994 -7.60% -6.78%
35 12/31/1989 1/31/1990 -7.28% -1.99%
36 9/30/1979 10/31/1979 -7.23% -8.41%
37 3/31/2012 5/31/2012 -6.98% 4.23%
38 12/31/1952 8/31/1953 -6.95% -1.66%
39 12/31/1967 2/29/1968 -6.89% 2.94%
40 6/30/1999 9/30/1999 -6.37% 0.94%

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

And here are the numbers outlined on a chart:

top 40 drawdowns in the stock market
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

 

Clearly, if you can’t handle volatility, you shouldn’t be in the stock market.


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About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.