Reversion to The Mean- Some Insight!
Hi mates here I want to share some key insight about Reversion To The Mean so let's start quickly noted some points sharing below-:
So what theory says is that Reversion to mean in finance means that estimate in which the price of the time is above its average range then there is a possibility of it's price being reduced in the future And if it remains below the average, then it can be expected to increase. This definition applies to all financial assets and includes the entire market.
So according to the theory it is not wise to assume that the market is at an all-time high or that any part of the market is booming due to being there you should be filled with enthusiasm, similarly there is no point in panicking when the market falls however, difficulties also arise because traders and investors assume that the current trend will continue the greed of investing in the same segment of the market which is doing well can give the illusion of easy returns. Some Professionals (brokers, advisors and fund companies) may try to justify their investments in any industry by saying that the industry is performing better than others and if this boom continues for a reasonable period of time it becomes common sense as this thing happened with tech stocks in 1999 time period and we all know what happened after that boom same thing happened in some industries which we usually call infrastructure industry in 2001 its fate is also a big crisis happened in.
The same thing happens in any one segment of the market like small caps are particularly affected by such conditions so when it does well it does very well it is easy to convince investors that it means something special whereas in reality nothing like this happens and when the sector performs better for a long time, many people follow it and in such a situation fund companies launch funds or start promoting existing schemes only at such times, diversifying investments seems like a loss-making proposition because one sector or the other will always do better than the average, so portfolio diversification seems to be a bluff and i don't think that any investor would have been immune by this.
Conclusion-: The average starts to dominate and then the returns revert back to the average and the late entrants to this party only get negative results, Come down and then there is a loss even if the rest of the market is booming this has been happening for a long time and will continue to happen. So friends no matter what the situation is you should never feel exuberant and nervous and always follow the rules made by you, If they are made! Thanks.
Best Regards- Amit
So what theory says is that Reversion to mean in finance means that estimate in which the price of the time is above its average range then there is a possibility of it's price being reduced in the future And if it remains below the average, then it can be expected to increase. This definition applies to all financial assets and includes the entire market.
So according to the theory it is not wise to assume that the market is at an all-time high or that any part of the market is booming due to being there you should be filled with enthusiasm, similarly there is no point in panicking when the market falls however, difficulties also arise because traders and investors assume that the current trend will continue the greed of investing in the same segment of the market which is doing well can give the illusion of easy returns. Some Professionals (brokers, advisors and fund companies) may try to justify their investments in any industry by saying that the industry is performing better than others and if this boom continues for a reasonable period of time it becomes common sense as this thing happened with tech stocks in 1999 time period and we all know what happened after that boom same thing happened in some industries which we usually call infrastructure industry in 2001 its fate is also a big crisis happened in.
The same thing happens in any one segment of the market like small caps are particularly affected by such conditions so when it does well it does very well it is easy to convince investors that it means something special whereas in reality nothing like this happens and when the sector performs better for a long time, many people follow it and in such a situation fund companies launch funds or start promoting existing schemes only at such times, diversifying investments seems like a loss-making proposition because one sector or the other will always do better than the average, so portfolio diversification seems to be a bluff and i don't think that any investor would have been immune by this.
Conclusion-: The average starts to dominate and then the returns revert back to the average and the late entrants to this party only get negative results, Come down and then there is a loss even if the rest of the market is booming this has been happening for a long time and will continue to happen. So friends no matter what the situation is you should never feel exuberant and nervous and always follow the rules made by you, If they are made! Thanks.
Best Regards- Amit
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