How long do you need to endure when faced with a market downturn ?

Part of the work of being a trainer is that I am relatively free to pursue some research to improve on my training materials so I got back to some R programming this week.

My statistical programming is rusty again and I have to get back to the basics of understanding data frames and how to put simple packages in my R Studio. And this means dealing with some stuff that professionals find trivial like manipulation of dates and processing the finance data from Yahoo Finance.

Fortunately, I was able to get some useful thing done within the last 2 days. I downloaded historical STI information and was able to measure the duration of market crashes.

I wrote a simple program in R to track crashes on the STI.

This program adopts the following rules :

• A crash occurs when the market dips 30% from the previous market peak.
• The timing of the start of the crash will then be set at the timing of the market peak.
• A recovery occurs when the market goes up 30% from the previous market trough.
• The timing of the market recovery will then be set to the timing of the market trough.

Unfortunately, I can only fetch market data as far back as 1987.

My program them screen dumps the crash data, which I reproduce here.

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Crash from  1607.1  To  1079.5 

From date:          

1990-03-27

Recovery at date :          

1990-10-11

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Crash from  2493.7  To  1073.5 

From date:          

1996-02-06

Recovery at date :          

1998-01-12

------

Crash from  1698.8  To  805.04 

From date:          

1998-03-19

Recovery at date :          

1998-09-04

------

Crash from  2582.94  To  1241.29 

From date:          

2000-01-03

Recovery at date :          

2001-09-21

------

Crash from  1808.41  To  1213.82 

From date:          

2002-03-19

Recovery at date :          

2003-03-10

------

Crash from  3875.77  To  1456.95 

From date:          

2007-10-11

Recovery at date :          

2009-03-09

From this dump, we can safely say that the longest period that we will need to endure from a market peak to market trough is 2 years. The longest period is not our most recent recession on 2007, but during 1996-1998 when we had the Asian Currency Crises.

My R program allows me to vary the conditions of a crash. If I set a crash to be 10% from a market peak and a recovery to be 10% from a market trough, I will, of course, see a lot more crashes in my program output but with a shorter duration.

Moving forward, this program will be added to my list of teaching materials for my workshop.

And in case you are wondering, we are not in a crash situation yet.

Over the next few weeks, I will be trying to determine whether an objective asset allocation between stocks and bonds would exist. Will post my findings here.