BSE Returns If You Missed The Top Days

Low Probability High Impact

The basics of statistics tell us that if you consider a normal distribution, a 1.96 standard deviation on either side of the mean contains 95% of all the observations. That means very few observations lie in the extreme tails. However, stock market returns are not normally distributed. They are often negatively skewed with high kurtosis. That means there are returns that are high impact but lie in the tails of the distribution.

The Low Probability High Impact events are the most important ones

We plotted the daily returns of BSE Sensex after removing outlier day returns – more than 5%, and more than 6% and replacing them with the sample mean to see how the equity curve would look Basically, if you missed a few important days in the market - 36 days out of the total 6362 days (0.5%) - your investment would give a 2x return. But if you just bought and did nothing then it would generate a 14x return. This is a huge difference! This information is particularly important for those who want to ‘Time the Market’ and catch only the days with upside. The chance that you will be able to catch those outlier positive returns is very low as their frequency of occurrence itself is low ~ 0.5% in 25+ years.

About the Author

Rohan Borawake is a SEBI Registered Investment Advisor and Finance Writer dedicated to providing valuable insights through his blogs and articles, catering to both everyday individuals and investors. For more of his content, follow him on LinkedIn by clicking the link - Rohan Borawake.

To gain a more profound understanding of quantitative analysis or witness its application in action, consider following Sabir Jana, the Head of Quantitative Research at Finsharpe, on LinkedIn. Click the provided link to connect with him on the platform- Sabir Jana.

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