Know your chances to make money in 2022 : A quantitative study
Every year one tries to relook at their investments and strategies with one goal of wealth maximization. What does history tells us about forecasting returns in Indian Markets since its inception ? Initially it was all speculation, then came Fundamentals and its analytics. Later Technical Analysis approach got people’s attention and now a new grade of studies which are called Quantitative studies that tries to dissect the market data with its own lens and make forecasting model.
Quantitative research is the process of collecting and analyzing numerical data and making inferences out of it . Statistics is the heart of these studies . However one downside of these studies is it catching absurd corelations. These absurd corelations can be referenced in our daily life like whenever you stand up in a match of cricket the player throws his wicket down or the colour of tie which a news anchor wears decides which direction the market will go on that specific day. However it has been very useful when these corelations are not absurd but backed by various factors. These factors can be studied in detail with the help of multiple regression analysis but this analysis is currently not included in study that we are discussing in this article today.
Now here is a quantitative approach of analysis to create a probability basket to predict 2022 returns basis past year data. The results of the study can be further dissected to validate and come to the same point.
CY in this study stands for Calendar Year Returns i.e. 1st Jan to 31st Jan for the respective year. The below table is Nifty TRI monthly & Annual return table from year 2001.
To begin ,the annual returns data is grouped in the range baskets. Then we would check for the years where returns have been over 25%+ for the year and try to understand the performance of the coming year. We have chosen 25%+ returns because 2021 has delivered us that number and we want to know the outlook for 2022
The table below tells us out of last 20 years we had 9 years that delivered 25%+ returns including 2021. Hence we get 8 data points to study along with the performance of their following years.
Lets derive the nectar out of this data which is the objective of our study. Here are your Chances (Probabilities for 2022) to make money next CY:
- 2022 would be a positive return year as overall returns expectancy is positive.
- Only 25% chances are that it will be a negative returns CY.
- 75% chances it shall be a positive year, thus making the odds in the favour of the investor.
- 50% chances for 2022 to deliver upto 25% returns on positive side.
- There is 25% chance that it will again deliver over 25% next CY.
- In case its a positive year then there are 33% chances you will have upto 10% returns and 66% chances it shall return you 10%+ returns this CY.
- Conclusion: Play the game. Remain Invested or Begin your investment journey. You have 3 to 1 chances to win this year as well. This data will also be helpful for someone decide on how to do the allocation in their multi-assets portfolio as you may remain moderately overweight on equity as an asset class.
Other Interesting Observations
- Last 5 CY have been net positive every year.
- This is another powerful data point. In last 10 CY , there were only 2 negative CY. Hence averaging 1 negative returns year & 4 positive return years. Further the data validate the same averages for last 15 years & last 20 years too.
- This study can also be extended to consider volatility in coming year. after 25%+ delivered returns.
- Can we add other asset classes for the year that delivered 25%+ returns to ensure that Capital Erosion Probability can be bought down to zero .
- Macro data can be studied for the years that delivered 25%+ returns and how can it be corelated to returns next year.
- Valuation ratios can also be compared in preceding and following year to derive some conclusion too.
Statistically this may be a useful study to a model one’s own strategies upon it but in no case do I claim this to be a definitive study. Reader’s discretion is advised.
Our approach is like a doctor who studies all the data from the lab reports and zero down on illness . Though he or she may not have to surgically cut the body (which eventually will validate the disease) to come at the same conclusion. Sometimes he may have to improvise if he has faltered upon the same.
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