Reversion to the mean


Reversion to the mean? What does that mean in the investment context? Economists swear by it. Investors are generally oblivious of the concept specially once the stock market is on a tear like it has been for 2013. The concept is that over long periods of time various assets (now valued more) tend to return back to their average or mean. The WSJ reports that the S&P 500 Index gained an average of 11.2% between 1980 and 2012 but exceeded that in 2013 to 19.8%. That simply means that over the next year or more, assets overall will tend to swing back to the average. Will that be in 2014 or 2014 or later? No one can tell us that. 
Comment: All we remember is the last good or bad experience we had in the market and react to that memory. If your asset allocation is solid, automatic investment plans with periodic re-balancing probably stands the best chance of success. Of course, a savvy investor could do well with extensive research and place wise bets and beat the market. But, like a lot of people I do not have time or the knowledge to make these bets so I am content not to follow the market every minute or hour content that I have made my bet in terms of my allocation for the long term. I may not get the 20% return some friends are getting but then I was not getting them prior to the market crash a few years ago when the tech bubble burst either!