Why do stocks always fall faster than they rise ?

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skor99
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Why do stocks always fall faster than they rise ?

Post by skor99 »

Be it a small correction or a total capitulation, stocks always seem to go down much faster than they rise. For any fall of any significant amount, the rise from that point in the past to the top ( from where the fall started ) took longer and then back upto that point always takes longer.
So, to make it clear, dow 25K to 30K might take 18 months, but the fall back to 25K in a correction might take only a month and the rise again back to 30K would surely be much longer than a month
Anybody wonder why ?
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Re: Why do stocks always fall faster than they rise ?

Post by TropikThunder »

skor99 wrote: Sun Jun 20, 2021 12:21 am Be it a small correction or a total capitulation, stocks always seem to go down much faster than they rise. For any fall of any significant amount, the rise from that point in the past to the top ( from where the fall started ) took longer and then back upto that point always takes longer.
So, to make it clear, dow 25K to 30K might take 18 months, but the fall back to 25K in a correction might take only a month and the rise again back to 30K would surely be much longer than a month
Anybody wonder why ?
Say you have $100,000 invested in an S&P500 index fund.

If you want to buy more, you have to have cash that is not yet invested.

If you want to sell, you only need to click "sell".

That said, big market moves are not made by retail investors like us.
Kookaburra
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Re: Why do stocks always fall faster than they rise ?

Post by Kookaburra »

Significant fear can occur quickly and snowball. Is there such a thing as rapid onset major optimism?
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Re: Why do stocks always fall faster than they rise ?

Post by Northern Flicker »

Stocks can have periods of rapid appreciation, sometimes called a melt-up. I have seen rallies of 40% in a short period of time like a few weeks.

But more often large scale steep movements are in the downward direction, leading to the saying that stocks take the stairs up and the elevator down. Sometimes the effect is a feedback loop in the market where selloffs trigger more selling.
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Re: Why do stocks always fall faster than they rise ?

Post by 123 »

Stocks are like a balloon, somewhat slow to inflate but deflate quickly.
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Re: Why do stocks always fall faster than they rise ?

Post by shess »

Kookaburra wrote: Sun Jun 20, 2021 12:54 am Significant fear can occur quickly and snowball. Is there such a thing as rapid onset major optimism?
I mean, Gamestop and AMC. But that's not really broad-based.

Personally, I don't think it's all that surprising, many systems work this way. Increasing stock market value is akin to increasing organization in a system - it takes long sustained and intentional effort to get things more organized, but it takes little effort and no intention at all to disorganize things. Running around in a panic pretty much suffices. Part of this is that reducing entropy adds tension to the system, which is potential energy, and when that tension is unblocked the energy is unleashed, which breaks other bonds releasing more energy causing a chain reaction. It dampens when the average bond being broken doesn't release enough energy to break new bonds.
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Re: Why do stocks always fall faster than they rise ?

Post by pseudoiterative »

I don't think it is true that individual stock prices always fall faster than they rise. The market price can react very quickly and significantly to new positive information. e.g. news of regulatory approval of one of biogen's drugs caused BIIB market price to jump +40% in one day (june 7).
TropikThunder wrote: Sun Jun 20, 2021 12:49 am If you want to buy more, you have to have cash that is not yet invested.

If you want to sell, you only need to click "sell".
That explanation isn't entirely satisfying: in both cases there is someone on the other side of the trade. Someone else has to have the cash to pay you when you sell. If it difficult for you to have cash at hand to buy, what makes it easier for the other party to have cash?
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Re: Why do stocks always fall faster than they rise ?

Post by anoop »

Bad news travels fast. Good news travels slowly.
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Re: Why do stocks always fall faster than they rise ?

Post by JustGotScammed »

Fear strikes all at once. Confidence comes back one at a time.
typical.investor
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Re: Why do stocks always fall faster than they rise ?

Post by typical.investor »

skor99 wrote: Sun Jun 20, 2021 12:21 am Be it a small correction or a total capitulation, stocks always seem to go down much faster than they rise.
Not to disagree, but meme stocks seems to be going up faster than average stocks go down.

It's simply a matter of flows. Pile in while it is going up, get out before it bottoms out. It's the practice and consequence of active trading.

But maybe it's just how we perceive things ...

Fun facts:

9.86% average gain on S&P 500's 20 best days
-9.54% average loss on S&P 500's 20 worst days

Source
Largest daily changes in the S&P 500 from 1923 (origination date)
https://en.wikipedia.org/wiki/List_of_l ... _500_Index
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Re: Why do stocks always fall faster than they rise ?

Post by GregG3 »

It is absolutely normal. Equities take stairs on the way UP and an elevator on the way DOWN.
That is why timing the market is next to impossible.
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Re: Why do stocks always fall faster than they rise ?

Post by grok87 »

we don't know but it seems to be a behavorial thing about stock investors whose aggregate behavior makes up the stock market. some of the old wall street adages:

1) stocks need to climb a wall of worry
2) cut your losses but let your winners run
3) don't try to catch a falling knife

for 2) the advice here is on point because investors tend to do the opposite. Sell stocks on the way up because they want to "lock in gains" and are afraid of losing the money they made.

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Re: Why do stocks always fall faster than they rise ?

Post by celia »

because of gravity!

Haven't you noticed that when you fall, it takes you longer to get up? :D
Meanwhile, your stocks are worrying about you. :oops:
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Re: Why do stocks always fall faster than they rise ?

Post by RickBoglehead »

typical.investor wrote: Sun Jun 20, 2021 2:26 am
skor99 wrote: Sun Jun 20, 2021 12:21 am Be it a small correction or a total capitulation, stocks always seem to go down much faster than they rise.
Not to disagree, but meme stocks seems to be going up faster than average stocks go down.

It's simply a matter of flows. Pile in while it is going up, get out before it bottoms out. It's the practice and consequence of active trading.

But maybe it's just how we perceive things ...

Fun facts:

9.86% average gain on S&P 500's 20 best days
-9.54% average loss on S&P 500's 20 worst days

Source
Largest daily changes in the S&P 500 from 1923 (origination date)
https://en.wikipedia.org/wiki/List_of_l ... _500_Index
Facts?

So OP's "seem" observation is incorrect?
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Re: Why do stocks always fall faster than they rise ?

Post by z3r0c00l »

RickBoglehead wrote: Sun Jun 20, 2021 5:42 am
Facts?

So OP's "seem" observation is incorrect?
For single days this is true, and for normal ups and downs, except for one especially bad day in the 80's. But the crashes are often faster than the booms. That isn't shocking as the event that causes the crash is rarely seen ahead of time and arrives suddenly and without warning. Then the recovery takes time, government action, slow signs of recovery, etc. The news of a major pandemic built up quick and the crash was very fast, the recovery took several months as governments slowly got moving on a response and as medical science found a way to fix it.

Last year it was 5 weeks from peak to bottom, and then about 5 months to regain that peak. And I would consider that a fast recovery compared to past crashes.
Last edited by z3r0c00l on Sun Jun 20, 2021 6:03 am, edited 1 time in total.
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Re: Why do stocks always fall faster than they rise ?

Post by radR investing »

A contributing factor is many institutional investors sell based on algorithms. A simple example is "sell 50% when crosses below 200MA." And many momentum investors follow a rule similar to Investors Business Daily: "cut your losses at 5%."
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Re: Why do stocks always fall faster than they rise ?

Post by SmileyFace »

Panic
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Re: Why do stocks always fall faster than they rise ?

Post by RubyTuesday »

I don’t believe they do so much as it feels like they do.

Previous post showed for single days it was not true.

Consider a system that grows on average at 6% (or whatever the VERY long term rate is for “stocks”).

It experiences large single day gains and losses that are roughly the same.

Maybe like in 2020, it experiences “medium term” losses and then a slower, but relatively quick recovery, leading you to experience and believe it has fallen faster than it grows. But here’s the thing, after the loss, for many days and short periods it must be growing faster than it’s long term average and on many days and for many short periods, it must be growing faster than it falls during this period of “recovery”.

So MOST of the time, meaning the most single days or the most of just about any arbitrary length period, I suspect the market is growing faster than it falls, or we wouldn’t have sustained growth.
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Re: Why do stocks always fall faster than they rise ?

Post by nisiprius »

Before we discuss "why," I'd like to see some non-anecdotal numbers to know if this is actually true. I'm prepared to believe that it is, but I want to see some data.

That will, of course, require some careful definition of terms. It shouldn't be too hard to collect some basic data once we know what we are looking for. But if we don't do this, we are sure to end up storytelling and cherrypicking specific incidents.

I suspect that is true but only in a very limited, narrow way, having to do with black swans and extraordinary events. That is, cases of what are ethically deception and fraud--whether legally or not--can cause the near-instantaneous realization that a stock is worthless, but it is hard to imagine what fact would cause a widespread and near-instantaneous legitimate realization that a stock is worth ten times its current price... other than, of course, self-sustaining bubbles and manipulation.

The choice of time scale is going to matter, and how big a change counts as a "rise" or a "fall."

Also, whether we are talking about individual stocks or the market as a whole.
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Re: Why do stocks always fall faster than they rise ?

Post by bertilak »

Could it be that fear is a bigger motivator than greed?

Does the very fact that this question is asked tend to support that theory?
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Re: Why do stocks always fall faster than they rise ?

Post by dodecahedron »

TropikThunder wrote: Sun Jun 20, 2021 12:49 am
skor99 wrote: Sun Jun 20, 2021 12:21 am Be it a small correction or a total capitulation, stocks always seem to go down much faster than they rise. For any fall of any significant amount, the rise from that point in the past to the top ( from where the fall started ) took longer and then back upto that point always takes longer.
So, to make it clear, dow 25K to 30K might take 18 months, but the fall back to 25K in a correction might take only a month and the rise again back to 30K would surely be much longer than a month
Anybody wonder why ?
Say you have $100,000 invested in an S&P500 index fund.

If you want to buy more, you have to have cash that is not yet invested. Or buy on margin

If you want to sell, you only need to click "sell".
Margin requirements have fluctuated historically and were extremely loose in the roaring 20s. Low margin requirements can contribute to speculative bubbles (and subsequent crashes.)
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Re: Why do stocks always fall faster than they rise ?

Post by markjk »

skor99 wrote: Sun Jun 20, 2021 12:21 am Be it a small correction or a total capitulation, stocks always seem to go down much faster than they rise. For any fall of any significant amount, the rise from that point in the past to the top ( from where the fall started ) took longer and then back upto that point always takes longer.
So, to make it clear, dow 25K to 30K might take 18 months, but the fall back to 25K in a correction might take only a month and the rise again back to 30K would surely be much longer than a month
Anybody wonder why ?
Assuming falls really are statistically faster than rises, I agree with a few other sentiments in this thread. People tend to panic sell and that probably contributes to the quick fall. Then, once people feel "burned" by the fall, they are slower to get back in. That might turn around and create a slower rise.
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Re: Why do stocks always fall faster than they rise ?

Post by tvubpwcisla »

It comes down to emotions. I am happy it works this way as when stocks go on sale the discounts happen fast and they are significant. I welcome the 10, 20, and 30 percent corrections as I can buy equities a lot cheaper and then ride the wave back up. Over time, markets will always rise, not fall. The most successful investors of all time ignore these declines and they stay the course and typically will purchase more the further things go on sale.

If folks would change their mentality from market decline or market drop or market crash to "on sale" they would no longer fear the corrections and actually welcome them.

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Re: Why do stocks always fall faster than they rise ?

Post by am »

TropikThunder wrote: Sun Jun 20, 2021 12:49 am
skor99 wrote: Sun Jun 20, 2021 12:21 am Be it a small correction or a total capitulation, stocks always seem to go down much faster than they rise. For any fall of any significant amount, the rise from that point in the past to the top ( from where the fall started ) took longer and then back upto that point always takes longer.
So, to make it clear, dow 25K to 30K might take 18 months, but the fall back to 25K in a correction might take only a month and the rise again back to 30K would surely be much longer than a month
Anybody wonder why ?
Say you have $100,000 invested in an S&P500 index fund.

If you want to buy more, you have to have cash that is not yet invested.

If you want to sell, you only need to click "sell".

That said, big market moves are not made by retail investors like us.
Knowing that the indexes rise over time, who are these institutional investors who react on every piece of news there is going in and out? Especially since many know that timing markets is impossible. Seems like they’d stop after losing money over longer periods.

Are these managers who have regular short term performance expectations or simply trade on whims and emotions?
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Re: Why do stocks always fall faster than they rise ?

Post by livesoft »

nisiprius wrote: Sun Jun 20, 2021 6:46 am Before we discuss "why," I'd like to see some non-anecdotal numbers to know if this is actually true. I'm prepared to believe that it is, but I want to see some data.
I don't know if this fits your requirement, but this white paper from Alliance Bernstein has some figures that might be of interest.
https://www.bernstein.com/content/dam/b ... iceShy.pdf
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Re: Why do stocks always fall faster than they rise ?

Post by QBoy »

Here is a study of the topic:

https://www.nber.org/papers/w3742
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Re: Why do stocks always fall faster than they rise ?

Post by balbrec2 »

JustGotScammed wrote: Sun Jun 20, 2021 2:14 am Fear strikes all at once. Confidence comes back one at a time.
+1
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Re: Why do stocks always fall faster than they rise ?

Post by MathWizard »

Leverage.

If you have a 15 to 1 and the market rises by 100% you are fine.
But if it drops by 7% ,you are wiped out .

Bears Stearns has 15 to 1 leverage when it got wiped out during the 2008/9 recession .

This does not count all the people who have less leverage who have to see to meet margin calls, accelerating the drop in prices.

Often you get a small bounce from people rushing in to get a bargain, but lenders would likely tighten margin requirements during a crash, limiting the amount of funds available to invest.
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Re: Why do stocks always fall faster than they rise ?

Post by JonFund »

Probably the biggest reason is simple math. If a $100 stock drops 25% to $75, it takes almost a 34% increase to get back to $100. If that same stock drops 50%, it takes a 100% increase to get it back to $100.
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Re: Why do stocks always fall faster than they rise ?

Post by JoMoney »

It's not just stock prices that work that way.
I can fall off a mountain quite precipitously, and there are an infinite number of ways to fall off it, despite it taking days to climb up a very narrow path requiring focused effort and discernment to avoid the most risky steps that are less likely to result in moving upward to the goal.
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skor99
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Re: Why do stocks always fall faster than they rise ?

Post by skor99 »

I thought of the analogies of a balloon deflating/popping and fall from a cliff, but those are purely physics controlled phenomena. Stock trades are made by people ( or algorithms written by people ) so there has to be some thought and process behind it.

Somebody mentioned Panic and maybe that works the same as gravity, but even for normal, even somewhat predictable 15-20 % corrections and pull backs, the fall is much more likely to be faster and steeper than the rise before or after.
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Re: Why do stocks always fall faster than they rise ?

Post by finite_difference »

shess wrote: Sun Jun 20, 2021 1:18 am
Kookaburra wrote: Sun Jun 20, 2021 12:54 am Significant fear can occur quickly and snowball. Is there such a thing as rapid onset major optimism?
I mean, Gamestop and AMC. But that's not really broad-based.

Personally, I don't think it's all that surprising, many systems work this way. Increasing stock market value is akin to increasing organization in a system - it takes long sustained and intentional effort to get things more organized, but it takes little effort and no intention at all to disorganize things. Running around in a panic pretty much suffices. Part of this is that reducing entropy adds tension to the system, which is potential energy, and when that tension is unblocked the energy is unleashed, which breaks other bonds releasing more energy causing a chain reaction. It dampens when the average bond being broken doesn't release enough energy to break new bonds.
I see what you did there.

Great description.
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Re: Why do stocks always fall faster than they rise ?

Post by Angst »

SmileyFace wrote: Sun Jun 20, 2021 6:22 amPanic
I agree, and panic is something that can feed upon itself quickly.

It's human nature, how we are wired. We are hugely loss averse. We don't panic over not having enough money in the market when equities are already going up and dragging our existing holdings along with them, but we will panic over leaving our money in the market when we think the bottom might fall out.

Perhaps a $0.00 floor, much like the rock at the bottom of a cliff, is a lot easier to relate to (and worry about) than the height of infinity.
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Re: Why do stocks always fall faster than they rise ?

Post by GoneOnTilt »

bertilak wrote: Sun Jun 20, 2021 6:49 am Could it be that fear is a bigger motivator than greed?

Does the very fact that this question is asked tend to support that theory?
I think you hit the nail on the head. And I seem to vaguely remember that behavioral science backs this up. If I remember correctly (from among other sources, Jason Zweig's book "Your Money and Your Brain"), we remember our losses much more acutely than we remember our gains.

But, I could be recalling this incorrectly. However I know it's true for me!
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Re: Why do stocks always fall faster than they rise ?

Post by exodusNH »

skor99 wrote: Sun Jun 20, 2021 12:21 am Be it a small correction or a total capitulation, stocks always seem to go down much faster than they rise. For any fall of any significant amount, the rise from that point in the past to the top ( from where the fall started ) took longer and then back upto that point always takes longer.
So, to make it clear, dow 25K to 30K might take 18 months, but the fall back to 25K in a correction might take only a month and the rise again back to 30K would surely be much longer than a month
Anybody wonder why ?
Human behavior. People panic and increase selling in a down market, further lowering prices (supply v demand).

And also math. A 20% drop requires a 25% rally to get you back to even. $100 - 20% = $80. $80 + 20% = $96, but $80 + 25% = $100.
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Re: Why do stocks always fall faster than they rise ?

Post by Northern Flicker »

anoop wrote: Sun Jun 20, 2021 2:10 am Bad news travels fast. Good news travels slowly.
The market is equally efficient at pricing in good news and bad news.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: Why do stocks always fall faster than they rise ?

Post by DB2 »

Fear/panic of losing is a more powerful emotion vs greed or making money. Human nature/psychology.
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Re: Why do stocks always fall faster than they rise ?

Post by Barefootgirl »

As opposed to gasoline prices that rise faster than they fall...
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Re: Why do stocks always fall faster than they rise ?

Post by hi_there »

Something something China.
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Re: Why do stocks always fall faster than they rise ?

Post by Toons »

Emotion





:mrgreen:
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Re: Why do stocks always fall faster than they rise ?

Post by Karamatsu »

Anybody wonder why?
It's the difference between the time needed to build a house of cards and the time needed to knock one down.

There's a well-recognized (but somewhat controversial) result from behavioral finance called loss aversion bias. It demonstrates that, on average, when under conditions of uncertainty, people prioritize avoiding losses significantly higher than they prioritize acquiring gains. So during a downturn, as prices fall, people's bias toward loss aversion causes them to sell in order to preserve their wealth. By doing that, prices fall even more, breaking through the resistance of those who are trying to hang on, and you get an avalanche effect, as those who've been around for some of the larger crashes over the past decades will no doubt remember. During the financial crisis, when things were looking their worst, even people in this forum were talking about the need for a "Plan B."

Once things stabilize, though, they're never really stable... you never know if it's the bottom or just a temporary lull in the selling, so again, loss aversion means people will be slower to buy back in than they were to sell. People often wait for a trend to be established, and a fair number wait until after prices recover to the point before the downturn before they are once again willing to risk capital. This is why being honest with yourself about your risk tolerance, and using that knowledge to design a sustainable portfolio are so crucial.

Of course there are people who sell into weakness, hoping to buy back at a lower price, but the observation that crashes happen much faster than recoveries seems to bear out the idea that, for the most part, the market is dominated by loss-aversion.
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Re: Why do stocks always fall faster than they rise ?

Post by JoeRetire »

skor99 wrote: Sun Jun 20, 2021 12:21 am Be it a small correction or a total capitulation, stocks always seem to go down much faster than they rise.

For any fall of any significant amount, the rise from that point in the past to the top ( from where the fall started ) took longer and then back upto that point always takes longer.
So, to make it clear, dow 25K to 30K might take 18 months, but the fall back to 25K in a correction might take only a month and the rise again back to 30K would surely be much longer than a month
Anybody wonder why ?
The premise is incorrect.

But it may simply be that you are missing the mathematics behind dollar changes versus percentage changes.
Just remember: it's not a lie if you believe it.
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Re: Why do stocks always fall faster than they rise ?

Post by LadyGeek »

^^^ That's an important point. Don't mix dollars with percentages. See the wiki: Percentage gain and loss
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Re: Why do stocks always fall faster than they rise ?

Post by NIOMARVIN83 »

As always, stocks can have periods of rapid growth and sometimes melting. Typically, large-scale steep moves in auction streaming are downward, leading to the adage that stocks go up the stairs and the elevator down when sell-off triggers sales. I don't think it's true that individual stock prices always fall faster than they rise. Last year, some stocks took 5 weeks from peak to bottom, and then about 5 months to recover from that peak, I read expert opinion that this is a quick recovery compared to past glitches in previous years.
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Re: Why do stocks always fall faster than they rise ?

Post by GoldenFinch »

JustGotScammed wrote: Sun Jun 20, 2021 2:14 am Fear strikes all at once. Confidence comes back one at a time.
Nice quote. Very true in my opinion.
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Re: Why do stocks always fall faster than they rise ?

Post by RubyTuesday »

“Faster” is a measure of rate of change. The same rate of change (same speed) of recovery takes longer to recover than the loss took. It’s just exponential math.

Example… If a stock goes from 100 to 50 in a period (rate of 50% per 1 period decrease), the same rate (speed) of recovery requires 1.7 periods to recover. The same speed seems “slower” because it takes longer but it’s the same speed.
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Re: Why do stocks always fall faster than they rise ?

Post by whodidntante »

If for some reason I was scared, I could sell a million before I finished my morning coffee. But I have plenty of fingers to count the number of months where I added 10k to my equities.
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ram
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Re: Why do stocks always fall faster than they rise ?

Post by ram »

Fear spreads faster than optimism.
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David Jay
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Re: Why do stocks always fall faster than they rise ?

Post by David Jay »

celia wrote: Sun Jun 20, 2021 5:20 am Haven't you noticed that when you fall, it takes you longer to get up? :D
..and longer every year :(
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
HootingSloth
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Re: Why do stocks always fall faster than they rise ?

Post by HootingSloth »

I am fairly sure that this is (1) a well-established statistical phenomenon and (2) not the result of confusion over absolute gains versus percentage gains. In particular, it is commonly observed that the distribution of, say, monthly returns of the stock market is "negatively skewed." For a distribution to be negatively skewed means that, compared to a normal distribution, there is a relatively long tail stretching out to the left and a relatively stubby tail stretching out to the right. In other words, it is more common to have a sudden and unexpectedly large change to the downside than to the upside. This well-documented phenomenon is still the case when you look at the distribution of log returns, which do not suffer from the asymmetric property that several folks have pointed to concerning percentage changes.

The paper that QBoy linked above seems to offer a pretty plausible reason for this (in addition to a bunch of fancy modelling to try to show that this reason actually does explain a good chunk of the negative skewness of log excess returns of stocks). Another well-known statistical phenomenon is that volatility of the stock market increases (that is, you get lots of very large up days and down days in succession) during bear markets. When daily-volatility is very high, it should be easier to move "longer distances" over a short number of days. Because volatility is typically higher when the stock market is declining, it makes sense that the overall moves down would happen more rapidly than the moves up.

All of this statistical evidence also seems largely consistent with everyone's thoughts above about the root emotional causes.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
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