Oftentimes people refer to "the mean" as being the long term linearly extrapolated trend line for long term stock growth.
Example shown here: https://ontargettoretire.com/wp-content ... 0_line.jpg
The problems include:
- The trendline can only be created after the fact. Future years of returns are going to alter the trendline
- Because the trendline is created after the fact, it's by definition that the past data is going to wiggle above and below that trendline, giving the illusion that there's some sort of mean for which to revert.
- Correlation is not causation. Future stock returns are under no obligation to even approximately follow a trendline based on the past.
Cheers.
Example shown here: https://ontargettoretire.com/wp-content ... 0_line.jpg
The problems include:
- The trendline can only be created after the fact. Future years of returns are going to alter the trendline
- Because the trendline is created after the fact, it's by definition that the past data is going to wiggle above and below that trendline, giving the illusion that there's some sort of mean for which to revert.
- Correlation is not causation. Future stock returns are under no obligation to even approximately follow a trendline based on the past.
Cheers.
Statistics: Posted by dcabler — Thu Nov 21, 2024 5:39 am — Replies 18 — Views 866
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