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Clustering of Best and Worst Days

Clustering of Best and Worst Days

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Clustering of Best and Worst Days

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  1. Clustering of Best and Worst Days

  2. Following up on ‘The 10 Best Days’

  3. Our academic-style research format Source: A. Stotz Investment Research • Ask a research question • Summarize previous academic research findings • Formulate a hypothesis to test • Select a relevant data set, remove errors and outliers • Design a methodology to test the hypothesis • Present and analyze the results • Advise how to apply to improve investment decisions Question Review Hypothesis Data Method Results Action

  4. Why would an investor miss the 10 best days? Source: A. Stotz Investment Research How likely is it that an investor misses the 10 best days? Well, when the market plunges one day it’s not uncommon that investors sell in panic

  5. What we learned in ‘The 10 Best Days’ Source: A. Stotz Investment Research • Missing only the 10 best days during 10 years seriously hurts your terminal wealth • On average, you miss 66% of the gain, but can miss as much as 75% • Stay invested, you don’t want to miss the 10 best days!

  6. Hypothesis Source: A. Stotz Investment Research • Missing the best days is likely to occur as a consequence of panic selling

  7. Testing our hypothesis on the S&P 500 over prior ten years Source: A. Stotz Investment Research • Gathered the time series of daily prices of the S&P 500 for the past 10 years (about 2,600 trading days) • Identified the 100 best and the 100 worst daily returns

  8. Tested clustering Source: A. Stotz Investment Research • To test the second hypothesis we plot the 100 best and the 100 worst days • Then observe whether good days and bad days are clustered around each other

  9. The best days tend to cluster around the worst days Sources: A. Stotz Investment Research, Thomson Reuters

  10. What we have learned Source: A. Stotz Investment Research • The best days tend to cluster around the worst days • Panic selling on the worst days can therefore result in missing the best days • Unless you’re a market-timing wizard, you will benefit from a buy-and-hold strategy

  11. Get new research first! • Get access to additional research & articles • Free membership and newsletter • Go to: babinow.com/join