{"id":15795,"date":"2021-07-20T10:26:21","date_gmt":"2021-07-20T00:26:21","guid":{"rendered":"https:\/\/www.prosolution.com.au\/?p=15795"},"modified":"2021-08-09T11:47:10","modified_gmt":"2021-08-09T01:47:10","slug":"mean-reversion","status":"publish","type":"post","link":"https:\/\/wealthcoach.com.au\/stage\/mean-reversion\/","title":{"rendered":"Let the trend of ‘mean reversion’ do the heavy lifting"},"content":{"rendered":"\n
\"mean<\/figure>\n\n\n\n

One of the challenges that many investors face is deciding what to invest in, how much and when. There are three methodologies that you can employ to help make this decision, but only two are supported by evidence. <\/p>\n\n\n\n

What is mean reversion?<\/h3>\n\n\n\n

Mean reversion is a financial theory that suggests a period of above average returns is often followed by a period of below average returns, such that the average return over both periods is close to an asset class\u2019 long term mean (or average) return.<\/p>\n\n\n\n

Many academics have studied mean reversion<\/a> and concluded it is an observable and repeatable trend in financial markets.<\/p>\n\n\n\n

Mean reversion makes sense. It is unlikely that an asset class can generated above average returns for an unlimited period of time. For example, the S&P500 index (US market) has returned over 15% p.a. over the past 12 years. Its long term mean return is close to 10% p.a. Therefore, the probability of it delivering that return again over the next 10 years (thereby generating a return over 15% p.a. over a 20-year period) is very low. In fact, modelling suggests the probability of that occurring is less than 1%. <\/p>\n\n\n\n