Be wary of reversion to the mean…& this is why
Aug 22, 2019Today, a quick look at three slides from our Next Level Wealth live coaching call for members this week.
Firstly, US stock markets are extremely expensive – on a par with where they were on Black Tuesday in 1929 – that doesn’t necessarily mean a crash is imminent, but if you buy at these levels expected returns must be low.
Valuations have never previously been sustained at these levels, so it’s unlikely to be different this time.
Secondly, valuations are almost three standard deviations away from the mean, but due to recency bias market participants expect momentum to continue.
It’s a bit like three 7-foot blokes walking into the room and expecting the next guy to be 10-feet tall.
It’s not going to happen, and mean reversion will eventually take hold.
The third and final slide shows looks at volatility in bear markets, and how ‘bull traps’ can catch out investors on the way down.
By the way, volatility is currently rising!
I discussed this in the short video here
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