Reversion Can Be Mean

David Powell

MONEY MANAGER GMO recently noted that, “There are no bad assets just bad prices.” The occasion was the S&P 500’s price outrunning earnings by 70% over the seven years through March. GMO’s punchline: The same thing happened in the seven years that ended with the dot-com peak in March 2000. This, of course, did not end well.

Two decades ago, I remember a friend telling me of steep losses in his retirement savings, the result of moving his entire 401(k) into aggressive, tech-heavy mutual funds during the runup. For some, it’s hard to be fearful when others are greedy. We hold out for the “last dance” in a market that hasn’t yet peaked.

As I write this, the S&P 500 continues its seemingly relentless march higher, even as we wait for corporate earnings to claw their way back to the levels we enjoyed in March 2020, when the bottom dropped out of the economy.

We read all the time that “past performance is no guarantee of future results.” For investing decisions grounded in principles that change slowly, if ever, there are some things we can count on. One principle that comes to mind: After a period of extremes, each investment’s rate of return eventually reverts to its long-term average.

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