Reversion to the Mean – A Reminder
Reversion to the mean is not a new concept and we most recently discussed the principle in a blog, Reversion to the Mean, posted on 11/1/2017. With the popular averages up some 30% in 2019 it might seem logical to expect a sharp reduction in the near future. This may occur, but it is important to recognize that historical averages tend to reflect trends over a long period of time rather than act as predictor of probable near term performance. For example, a single coin toss may be heads or tails and could be heads or tails several times in a row. However, over an extended period involving thousands of coin tosses, heads and tails are almost certain to be approximately equal.
Investors should understand that the stock market is substantially unpredictable over the short term, but has been quite consistent over the long term. A long-term strategy involving appropriate rebalancing is likely to support portfolio objectives over time.
All comments and or suggestions are welcome.
Walter J. Kirchberger, CFA