Jeremy Taylor, CFP®, ChFC®
A lot of Seattle sports fans have recently been getting on the Mariners’ bandwagon. It’s been many years since we’ve had a win-loss record as good as we did at the All-Star break. As a lifelong fan of the Ms, I can’t help but be cautious with my excitement. It seems like whenever we are close to leading the division or making the playoffs, we have a five-game losing streak taking us out of contention. The stock market has a lot of similarities. The average individual and many professional money managers love to “get on the bandwagon” and buy stocks in the best returning categories. They see past performance and either assume the future will look similar or just don’t want to miss out. Although one category may outperform for quite some time – such as technology over the last few years – it will eventually come back to earth. I will forever root for the Mariners but there is a good chance they’ll do the same. Mean reversion is an extremely strong force in our world.
Mean reversion is the theory that asset prices and investment returns eventually revert (or go back) to their long-run “mean,” or average. Growth stocks do not outperform value stocks over the long run. Bonds and cash do not outperform stocks over time. And large companies do not outperform small companies either. There have been countless studies explaining this and some of the world’s best-known investors (a guy named Warren Buffet comes to mind) and scholars (such as Nobel Prize winner Eugene Fama) focus on it. As much as I hope it doesn’t happen, there is also a pretty good chance that the Mariners record reverts to the mean before the end of the season. The difference with investing is that you can take advantage of these movements. For example, we each have an opportunity to add money when stocks are down, or sell a portion when the market is up.
The key takeaway we always want our clients to have is that there is no one way to invest. And it is extremely difficult to pick the best sector or category to invest in this year or in any other time frame. Because of this, we choose to focus on a globally-diversified portfolio with stocks of many different types and sizes. When investments are put together the appropriate way, we are able to minimize the chance that we “got on the bandwagon.” To put it in baseball terms, diversification allows us to root for the Mariners, Astros, Yankees and Red Sox all at one time, without feeling guilty!
The good news about mean reversion is that it doesn’t happen every single year, so we could finally see the Mariners in the playoffs again. Who knows, we may even get our World Series win one day.
As always, feel free to reach out with any questions. Otherwise, we look forward to catching up soon.