Question

What is 'reversion to the mean' and how is it relevant to mutual fund performance?

Accepted Answer

The statistical tendency for extreme performance (very high or very low) to eventually move back toward the long-term average — today's top performer often becomes tomorrow's average performer — Mean reversion in fund performance means that exceptionally high or low performance periods tend to be followed by performance closer to the long-term average. Last year's top performer may have benefited from a specific market environment that won't repeat. This is why chasing recent top performers (recency bias) often leads to disappointment — their outperformance was partially temporary.