Projecting the future based on recent events is built into our instinctive circuitry but, as we all know, basing investment decisions on the latest market fluctuations works against long-term returns. This article maps out one-day correlations for returns of the S&P 500 index since 1928, and other tables show correlations over 5 trading days, four weeks, 12 months and four quarters—and all of them are weak. With annual data, the correlations gradually increase with each additional year of time horizon. Strong correlations do occur but only when dealing with decades: higher returns over a 15 year span are correlated with lower returns the following 20-year span (r = – .91) due to the constant tendency toward reversion to the mean long-term return.

Click here to read the paper. >>