Common wisdom says that, as an investor, you should avoid knee-jerk reactions to stock market fluctuations. And you’ve probably talked down your share of clients who had such reactions — perhaps even explaining mean reversion to them.
Support for mean reversion, along with further fine-tuning details, is provided in a report by Richardson GMP.
Using S&P 100 companies, the firm measured three-day share price changes — both up and down — over the last five years, as described in the report by Craig Basinger, CFA. Subsequent price moves were measured over three, five and 10 days.
After analyzing the results, it’s clear that returns tend to be more substantial following a big price drop, and gains tend to be muted following a big price gain.
As a result, “Investors should not try and chase near-term returns after a sudden jump,” says Basinger. “And, following a sudden sell-off, may want to reconsider bailing, waiting for a potential short-term partial rebound.”
Read the full report.