Bogleheads

[Dan Kohn]

I love this visualization of returns of the S&P 500. Who knew it's been around since 1825? And what a great illustration of the Normal Distribution.



Source is Daily Kos.

[Roverdog]

Dan,

Thanks for the graph (and reference).

I give a few lectures in a financial planning elective here at school, and that's a keeper!

Bob

[Henry Sadovsky]

Hi Dan.

That is almost certainly not a normal distribution. You might take a look at: The Misbehavior of Markets: A Fractal View of Risk, Ruin & Reward by Benoit Mandelbrot.

H.
_________________
"What we can't say we can't say, and we can't whistle it either."
Frank P. Ramsey"

(f.k.a. Zalzel)

[mark500]

That is almost certainly not a normal distribution.

Help me with statistics here. It looks similar to a bell curve.

[superlight]

[Rodc]

[stratton]

Considering current daily volatility we could be at -25 or -30% by the end of the year. Or down more.

Paul

[ziggy29]

[jeffyscott]

Not sure that looking at discrete calendar years is all that meaningful in putting declines in perspective. 1973-74 saw about a 50% decline as did 2000-2002, I don't know that having it all in one calendar year (hopefully) this time really makes much difference.
_________________
Jeffy

press on, regardless - John C. Bogle

[maywood]

Very interesting, thanks for posting!

The only good thing I could come up with was, if someone survived this year they should be able to survive anything!

Maywood

[TheEternalVortex]

Where is the source for the data? The S&P500 doesn't go back that far...

[dbr]

[tadamsmar]

[TheEternalVortex]

I looked at it from 1950-2008 and it doesn't look normal, but a histogram is a poor way of judging normality.

Running an Anderson-Darling test gives a p-value of 0.442, which is consistent with the data being normal. However to disprove normality for something that is close to normal one normally needs more data points than ~50.

[dbr]

PS With respect to the statistics, there are tests for normality and characterizations of properties of data distributions that reflect the shape of the distribution. In the end it is usually appropriate to find what sort of distribution is a good fit to the data, if any of the usual suspects is appropriate at all.

That data might not be normally distributed and that data might not be well described by any of a variety of mathematically tractable representations are two completely different issues. A different issue is the problem of how to represent rare events in a distribution that is generally well matched to a standard model overall. All of these problems are not novel and are much studied by those who need to deal with the relevant subjects. It may well be that success in this area when applied to markets leaves much to be desired.

[tadamsmar]

[Rick Ferri]

Dan,

Maybe the axiom that for every action there is an equal and opposite reaction holds true for the stock market next year.

Rick Ferri

[regmac]

[quote="Dan Kohn"]I love this visualization of returns of the S&P 500. Who knew it's been around since 1825? And what a great illustration of the Normal Distribution.

The graph supports two points of view that we’ve been hearing for quite sometime: 1) Gary Schilling, who has been right on every call he’s made throughout this horrible year, places a fair value of “600” on the S&P; 2) Myriad analysts keep insisting that at these levels we are being presented with a buying opportunity that will not present itself again in our lifetime.

[tadamsmar]

[dbr]

[quote="regmac"]

[bobcat2]

How did they arrive that the S&P 500 index is down 50% in 2008? According to M* the Vanguard S&P 500 Index fund is down about 41% year-to-date and also down about 41% over the last twelve months. Thru the end of November the Index was down almost 38%. Those are really bad numbers, but they are not 50%.

Bob K
_________________
The real difficulty in changing any enterprise lies not in developing new ideas, but in escaping from the old ones. - JM Keynes
Good questions outrank easy answers. - PA Samuelson

[tadamsmar]

[tadamsmar]

[quote="regmac"]

[bobcat2]

Yes, you are right. -50% does not mean -50% or worse. Instead it means worse than -40%, but better than -50%. So if one draws the graph using end of November data, 2008 returns would not be in the left most column, but instead one column to the right. But if you draw the graph with data so far this week then 2008 gets dumped into the left most column. So where will it be by December 31? It could stay in the left column, move one column rightward, or find itself in a brand new -60% column.

Bob K

edit - It looks like the graph is correct (2008 worse than 1931) using returns from close of business on Monday, but incorrect as of close of business on Tuesday. Who knows how accurate by close of business today
_________________
The real difficulty in changing any enterprise lies not in developing new ideas, but in escaping from the old ones. - JM Keynes
Good questions outrank easy answers. - PA Samuelson

[fluffyistaken]

[quote="tadamsmar"]

[tadamsmar]

The comments section of the link in the OP is interesting.

Anyone yearning for a good economics thread with politics and crude humor mixed in should check it out, the stuff we can't have here.

In particular, the photo of the guy carrying the "Jump you &%$s!" sign past the NYSE.

[Kenster1]

http://www.marketwatch.com/new....6DFD1EE%7D

The S&P's dividend yield now higher than the 10-year T-note's

[grayfox]

Come one, people. How often do you get the chance to be part of something big like this? This is a rare opportunity--a once in a lifetime event.

So are we going to let 1931 beat us?

All they had back then was telephones, pencils, paper, ledgers and balance sheets.

We now have computers, high-speed networks, the internet, modern portfolio theory, ETFs, credit default swaps, and mortgage-backed securities.
We now have Financial Weapons of Mass Destruction--something that Wall Street professionals in 1931 couldn't have imagined in their wildest dreams!

I say go for the record. Let's bring it down 60% for 2008 !

Are you with me?
I said, are you with me?

[jeffyscott]

Cliff Asness

[bearwolf]

[Christine_NM]

It's the uptick rule, which began after 1937 and ended in July 2007. 1931, 1937, and 2008 all are years with no uptick rule.

Without the uptick rule, volatility will continue and there will be no "back to normal" for the market.

Facing this, in order to maintain an overall portfolio at an unchanged risk tolerance then one must permanently reduce the equity allocation. Or reduce it till the SEC comes to its senses and restores the uptick rule.

I'm not sure buy and hold makes sense without an uptick rule. So far, it doesn't. Something like Taleb's 5-10% stock trading and 90-95% Treasuries is more appropriate for a riskier (more volatile) market.

[Rodc]

[jeffyscott]

I hope those of you begging for -60% for 2008 realize that this would mean 587 which would be -31% from yesterdays close.
_________________
Jeffy

press on, regardless - John C. Bogle

[TheEternalVortex]

[Kenster1]

[Rodc]

[Christine_NM]

[Pacific]

tadamsmar said:

[tadamsmar]

[madsinger]

What I don't like about the original graph in this post is the "arithmetic" as opposed to the "geometric" nature of it. There seems to be an implication that a "+10 to +20" year balances out a "-10 to -20" year. Or that the "+50 to +60" years even "surpass" the losses of the "-40 to -30" years. If the "x-axis" was spaced in a "log" fashion, then the "-50" block would have to be as far to the left as a "+100" block. A "-40" block would be "balanced" by a +67 block.

This would make those blocks on the left side, further to the left, and the "normalness" would be "less normal".

(That multiyear 1930-1932 "-90 to -80" block would need a "+500 to +1000" block on the right to counteract it!).

-Brad.

[peter71]

[Bharat]

[grayfox]

Business idea for the recession: Make T-shirts that say:

I Lived Through The Crash of 2008
And All I Have Left is this Lousy T-Shirt

[yobria]

[Murray Boyd]

How can anyone know what the P/E is right now, what with the E crashing and all?

[sgr000]

[grayfox]

Outstanding work! This forum never ceases to amaze me.

I have a request. Would it be possible to post a table of nominal return and real return for each year from 1871 to present?

[Henry Sadovsky]

.
Hi sgr000.

That was very interesting. Does not the use of yearly data unnecessarily limit the power of the analysis? My understanding of the fat-tail question is that it is not a conjecture, but that fat-tails are seen in the analysis of daily data. I don't have the data at hand, but I seem to recall something to the effect that if (U.S. equity) market returns were normally distributed, the probability of seeing days like 10/19/1987, and all the +/- >3% days we are seeing this year would be vanishingly small.
_________________
"What we can't say we can't say, and we can't whistle it either."
Frank P. Ramsey"

(f.k.a. Zalzel)

[Dan Kohn]

sgr000, thanks for the outstanding work.

[sgr000]