I ran across this great chart at The Sudden Debt Blog. It shows just how extreme the performance of the last 12 months has been. Not only did we overshoot the mean to an extreme March low, but we’re now sitting at an outlier point in terms of 6 month returns. While this mean reversion doesn’t necessarily mean the market will fall substantially, it is safe to assume that returns going forward will be nowhere near as high as they have been over the last 6 months:
One immediate observation is that the market has just swung from one near record (-40%) to another (+40%) between March and September 2009. Since 1871, only the Great Depression era exhibited greater swings in share prices.
- How unusual is such an event, from a statistical standpoint? Let’s look at the next chart, a familiar distribution histogram (click to enlarge). The median 6-month performance is +3.1% (the mean is 2.7%) and the standard deviation around it (known as sigma, denoted by the Greek letter “σ”) is 12.2%.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.