Mean reversion
Understand the idea that unusually high or low returns may move back toward a longer-term average.
Reviewed August 21, 2026
Mean reversion is the tendency of a value that has moved unusually far from its historical range to move closer to its longer-term average over time.
What it means for investments
When an asset class has recently delivered unusually strong returns, mean reversion suggests that assuming the same exceptional performance indefinitely may be unwise. The reverse can also be true after an unusually weak period.
Mean reversion is a tendency, not a schedule. It does not tell you exactly when a reversal will occur, how large it will be, or whether the historical average remains appropriate.
Using the concept in a financial plan
Long-term projections generally benefit from forward-looking return assumptions instead of simply extending the most recent results. A planning assumption should also account for uncertainty rather than treating an average return as guaranteed.
When using a planning tool, compare historical market data with its forward-looking return assumptions rather than treating either one as a prediction.
Related ideas
- Valuation
- Diversification
- Sequence-of-returns risk
- Expected return