risk
Turbulence Bunches In Time
The rule
Market storms come in bunches - big moves breed big moves, calm breeds calm. So risk is never spread evenly across the calendar.
Where it flips
Believing storms come in bunches can tempt you to time exits and re-entries around them, but the bunches are only clear after they start, not before. The fix is to stay invested with holding sizes you can hold through a stormy patch, not to dodge in and out chasing the calm.
Mandelbrot noticed that wild days do not fall randomly across the year like scattered raindrops; they arrive in bursts. A violent day is usually followed by more violent days, and long calm stretches tend to stay calm, until they suddenly don't. So an 'average' month is a fiction: most of the danger is packed into a few bunched weeks. Standing in the market during a storm is very different from standing in it during the lull.
A worked example
Arjun looks at a fund's calm yearly average and feels safe. But nearly all of its worst days came bunched in one panicky fortnight. Because he happened to add a big lump sum just as that bunch began, his experience was far rougher than the smooth average suggested. [illustrative]
How to spot it
- ·A run of big up-and-down days back to back
- ·Months of quiet snapping into sudden chaos
- ·'The average was fine' hiding one brutal week
Benoit Mandelbrot · The (Mis)behavior of Markets