{"id":2131503,"date":"2020-07-15T12:33:06","date_gmt":"2020-07-15T07:03:06","guid":{"rendered":"http:\/\/stockviz.biz\/index.php\/?p=2131503"},"modified":"2021-09-14T12:35:04","modified_gmt":"2021-09-14T07:05:04","slug":"fat-tails-an-introduction","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2020\/07\/15\/fat-tails-an-introduction\/","title":{"rendered":"Fat Tails, an Introduction"},"content":{"rendered":"\n<p>Benjamin Graham described Mr. Market as a manic-depressive, randomly swinging from bouts of optimism to moods of pessimism. While equities and markets exist in perpetuity and can create wealth in the long-term, most investors don&#8217;t have the luxury of remaining invested forever. We have extensively discussed the problem of sequence-of-returns risk for investors who have finite investment horizons in our Free Float newsletters (<a rel=\"noreferrer noopener\" href=\"https:\/\/stockviz.biz\/2020\/06\/09\/mitigating-sequence-risk-through-asset-allocation\/\" target=\"_blank\">Intro<\/a>.)<\/p>\n\n\n\n<p>A bigger problem than <em>sequence<\/em>, is the <em>severity<\/em> of low-probability events. Also called fat-tails or black-swans.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/github.com\/stockviz\/blog\/raw\/master\/fat-tails\/plots\/NIFTY%2050%20TR-histogram.png\" alt=\"\"\/><figcaption>NIFTY 50 Monthly Returns<\/figcaption><\/figure>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/github.com\/stockviz\/blog\/raw\/master\/fat-tails\/plots\/NIFTY%20MIDCAP%20150%20TR-histogram.png\" alt=\"\"\/><figcaption>NIFTY MIDCAP Monthly Returns<\/figcaption><\/figure>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/github.com\/stockviz\/blog\/raw\/master\/fat-tails\/plots\/NIFTY%20GS%2010YR-histogram.png\" alt=\"\"\/><figcaption>NIFTY 10-year government bond Monthly Returns<\/figcaption><\/figure>\n\n\n\n<p>While an investor can mitigate an unfortunate <em>sequence<\/em> of returns through diversification, a market tsunami can hit all assets at the same time.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/github.com\/stockviz\/blog\/raw\/master\/fat-tails\/plots\/corona-months.png\" alt=\"\"\/><figcaption>US\/India Equity and Bonds during the Corona Panic<\/figcaption><\/figure>\n\n\n\n<p>The charts show how years of returns can get wiped out in a month in the markets. While investors mostly focus on the <em>average<\/em>, the tails end up dictating their actual returns.<\/p>\n\n\n\n<p>While using traditional statistical tools like average, std-deviation, correlation, etc. makes sense 99% of the time, they breakdown during that 1% of the time where an investor needs them to hold. This is the main motivation behind studying tail-risk events.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Benjamin Graham described Mr. Market as a manic-depressive, randomly swinging from bouts of optimism to moods of pessimism. While equities and markets exist in perpetuity and can create wealth in the long-term, most investors don&#8217;t have the luxury of remaining invested forever. We have extensively discussed the problem of sequence-of-returns risk for investors who have &hellip; <\/p>\n","protected":false},"author":2,"featured_media":2091813,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471],"tags":[4033],"class_list":["post-2131503","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-insight","tag-risk","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2131503","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=2131503"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2131503\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media\/2091813"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=2131503"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=2131503"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=2131503"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}