After a big market run, investors tend to develop a weird hobby: predicting the next crash like it’s a seasonal sport.
“Stocks have been up a lot… so we’re due,” people say, as if the market is a vending machine that must dispense a bear market after enough quarters.
Unfortunately (or fortunately, depending on your coping mechanisms), the stock market does not run on fairness, vibes, or cosmic balance sheets.
The more useful question isn’t “Are we doomed because returns were great?” It’s:
What has typically happened to stock returns after periods of above-average performanceand what should an investor do about it?
The answer is more comforting and more annoying than a simple forecast: history shows patterns, but it refuses to hand you a calendar invite for the next correction.
Above Average Returns: Common, Not Magical
One reason investors get spooked after a strong stretch is that we mentally compare reality to “average” as if markets politely hover near the mean.
They don’t. Returns are lumpy. They sprint, they nap, they trip over their own shoelaces, and then they sprint again.
Looking at long-term U.S. market history (rolling periods going back to 1926), the market’s average annual return is roughly around the 10% neighborhood,
but the actual experience over 5-year windows can swing from “party” to “existential dread.”
Rolling Returns: The Data That Feels Like Real Life
When analysts examine “rolling” 5-year or 10-year returns, they’re essentially sliding a window across time month by month.
Yes, those windows overlap (and that matters for statistical independence).
But overlapping windows also mirror how humans invest: you don’t invest from 1995 to 2000, freeze time, and then reboot your life like a video game character.
You invest continuously, and your “start date” changes every time you add money.
Ben Carlson’s point in the original A Wealth of Common Sense post is not “here’s the one true forecast.”
It’s: don’t assume a great run automatically means the next period must be awful, and don’t let that assumption bully you into market-timing decisions.
So What Happened After Big Runs? The Surprise (and the Fine Print)
In Carlson’s analysis, as of late 2014 the S&P 500 had delivered around 16% annualized over the previous five yearsstrong, but not unprecedented in market history.
When he grouped historical 5-year return windows into buckets and then looked at what came next,
one result jumped out: even after a 5-year period with 15%–20% annual returns, the following 5 years averaged over 13% annually.
That’s not what most “we’re due!” headlines would lead you to expect.
Here’s the big takeaway (the fine print matters): the average was strong, but the range was wide.
After a hot streak, future returns have historically landed anywhere from “still great” to “please stop checking your account.”
Past performance doesn’t force the market to revert on your preferred timetable.
Longer Horizons Calm Things Down (A Little)
Carlson also highlights that 10-year windows tend to be more clustered than 5-year windowsextremes get sanded down by time.
In his historical review, even decade-long above-average performance periods were followed, on average, by roughly 9%–10% annual gains,
with the long-run 10-year average around 10.4%.
Translation: strong returns don’t automatically flip a switch to “bad returns only.”
They can, however, change the odds and the expectations.
Why Great Returns Can Still Mean Lower Expected Returns
If you’re thinking, “Wait, shouldn’t high returns pull future returns down?”you’re not wrong to ask.
Markets often exhibit mean reversion over long horizons, especially through changes in valuation.
When prices rise faster than fundamentals for years, valuations can get stretched.
If valuations later drift back toward normal, that reversion can subtract from future returns.
CAPE, Valuations, and the “Math Doesn’t Care About Your Feelings” Problem
Valuation tools like Robert Shiller’s CAPE ratio have been widely studied as rough indicators for long-horizon return expectations.
They don’t predict next quarter’s return (sorry), but they’ve historically shown relationships with forward long-term outcomes.
Some researchers and asset managers frame it as a simple idea:
when your starting valuation is high, the long-term runway for returns may be lowerunless earnings growth or other inputs do something extraordinary.
The key word is may. Valuations are not a timing tool. They’re a “set expectations” tool.
A high valuation environment can persist for yearslong enough to make impatient market-timers look very confident right up until they’re not.
Think of valuation as a weather forecast for the decade, not a minute-by-minute radar map.
Momentum vs. Mean Reversion: Yes, Markets Can Be Weird in Two Directions
A common misunderstanding is believing markets must be either momentum-driven or mean-reverting.
Reality is messier (and therefore more employable for people who write finance papers).
Over shorter horizons, markets often show momentumrecent winners can keep winning for a while.
Over longer horizons, markets and segments can show reversalthe leaders cool off, the laggards recover, valuations normalize.
Why This Matters After a Hot Streak
After above-average performance, investors face a psychological trap:
they confuse a good run with a guaranteed future.
If momentum persists, chasing looks smart… temporarily.
But if mean reversion shows up later (as it often does in some form), the same behavior becomes an expensive lesson.
The market doesn’t announce which regime it’s in. It just… does market things.
The Real Return Killer: What Investors Do After the Hot Streak
If there’s a villain in this story, it’s not “high past returns.”
It’s what humans tend to do when they see them: performance chasing, panic selling, and endless entry-point hunting.
Vanguard has long warned that investors often chase “winners” and dump “losers,” a behavior that tends to end badly.
Morningstar’s “Mind the Gap” research repeatedly highlights a related issue:
investors’ dollar-weighted returns often lag the funds’ reported time-weighted returns because money flows in after good performance and out after bad.
Market Timing: The Cost of Missing the Best Days
Multiple major firms have published versions of the same cautionary tale:
being out of the market during a small handful of the best days can dramatically reduce long-term results.
Fidelity has illustrated how missing only a few top-performing days over decades can cut cumulative gains significantly.
Schwab has similarly shown that missing top days can slash annualized returnsbecause the market’s biggest positive days often cluster around periods of fear and volatility.
The cruel joke is that investors usually step aside precisely when the market is most likely to rip higher.
If you’ve ever thought, “I’ll just wait until things calm down,” congratulationsyou have perfectly described how people accidentally miss rebounds.
Markets tend to recover when headlines are still messy. The market is a forward-looking machine with zero concern for your need for emotional closure.
A Practical Playbook After Above-Average Performance
When markets have been strong, you don’t need a prediction. You need a plan that behaves well even when you don’t.
Here are investor-friendly moves that don’t require a crystal ball (or a dramatic monologue on financial TV):
1) Rebalance Like a Grown-Up
If stocks rally hard, your portfolio can quietly become riskier than you intended.
Rebalancing is the boring act of selling a little of what grew and adding to what laggedessentially forcing “buy low, sell high” without needing to guess the future.
It’s the investing equivalent of putting vegetables on your plate.
Not glamorous. Extremely useful.
2) Reset Your Expectations (Not Your Strategy)
After a long stretch of strong returns, it’s reasonable to expect that forward returns could be lower than what you just experienced.
That doesn’t mean “cash forever.” It means:
plan for a wider range of outcomes, and don’t budget your life around a recent hot streak repeating indefinitely.
If your plan only works when markets deliver 15% every year, your plan isn’t a planit’s a wish list.
3) Keep Contributing (Especially When It Feels Uncomfortable)
Regular contributions (like dollar-cost averaging through retirement plans) help you buy shares across many price environments.
When the market is up, you keep building.
When the market is down, you’re buying at better priceseven if your emotions insist you should be doing literally anything else.
The goal is not to “win” the month; it’s to build ownership over decades.
4) Diversify Beyond “Whatever Just Worked”
After above-average U.S. stock performance, people often concentrate further into U.S. large-cap growth because it feels safe (it is not).
Diversification across regions and styles won’t always look brilliant in any single year,
but it reduces the risk of getting trapped in a single market’s lost decade.
The market does not guarantee that the recent leader stays the leader.
5) Use Simple Structures If You’re Prone to “Tweaking”
If you know you’re the type to tinker after reading one scary headline, lean into structures that reduce decision points:
broad index funds, balanced funds, or target-date funds.
The fewer “big calls” you have to make, the fewer chances you have to make them at the worst possible time.
What to Watch Instead of Predicting the Next Crash
You can’t reliably forecast the next 10% correction (and anyone who says they can is selling something).
But you can track factors that help you understand the environment:
- Valuations: not for timing, but for setting realistic long-term expectations.
- Earnings and cash flows: the fundamental engine under long-run returns.
- Interest rates and inflation: inputs that shape discount rates and bond alternatives.
- Market concentration: when leadership is narrow, diversification matters more (not less).
- Your own behavior: the only risk factor you can actually control every day.
Conclusion: You’re Not DoomedYou’re Just Not Entitled to Easy Mode
Periods of above-average performance don’t “cause” a crash, and they don’t guarantee a slump.
Historically, markets have often produced perfectly decent forward returns even after strong runsespecially over longer holding periods.
The bigger risk is the story investors tell themselves after the fact:
either “this will last forever” or “this must end tomorrow.”
Both stories tend to lead to expensive decisions.
If you want the most realistic advantage after a hot streak, it’s not prediction.
It’s discipline:
rebalance, diversify, keep contributions steady, and treat valuation as an expectations toolnot a panic button.
In other words: act like an owner, not a fortune teller.
Additional : Real-World Experiences Investors Tend to Have After a Big Run
Talk to enough long-term investors and you’ll notice a pattern: the market doesn’t just test your portfolioit tests your personality.
After a period of above-average performance, people usually go through a very relatable emotional trilogy.
Act One is pride: “I knew investing was a good idea.” Act Two is anxiety: “This feels too good… something bad is coming.”
Act Three is action: the urge to do something to prove you’re paying attention.
That last part is where returns often get dented.
One common experience: an investor sees their stock allocation drift upward after a strong market.
They meant to be 70/30, but now they’re closer to 85/15 without realizing it.
The portfolio is riskier, but it doesn’t feel riskierbecause recent history makes risk look like a myth invented by pessimists.
Then a normal correction arrives (not a world-ending crash, just a regular market tantrum),
and suddenly the investor discovers they were never emotionally signed up for 85/15.
They sell in frustration, often near the bottom, and tell themselves they’ll “get back in when things stabilize.”
Translation: they convert volatility into permanent damage.
Another experience shows up in retirement accounts:
after a multi-year rally, people check balances more often.
That seems harmless until it becomes a feedback loopmore checking leads to more reacting.
A down week feels like an emergency because the brain has gotten used to up weeks as “normal.”
Investors start scanning for “safe” alternatives, which often means hiding in cash after prices have already fallen.
When markets rebound quickly (as they sometimes do), the investor feels betrayed by their own caution.
The lesson isn’t “never be cautious.” It’s that caution should be designed before the panic, inside the portfolio, through diversification and a risk level you can live with.
A third experience is performance envy.
After above-average performance, leadership gets narrow in conversationeven if it’s broad in reality.
Everyone talks about the same sector, the same handful of stocks, the same “obvious winners.”
Investors who owned a diversified portfolio feel like they “missed it,” even if they did perfectly fine.
So they chase what worked, often buying after a huge run-up, turning yesterday’s momentum into tomorrow’s regret.
This is exactly why rebalancing feels emotionally backward: it asks you to trim what’s exciting and add to what’s boring.
But boring is frequently where the future surprise lives.
The investors who tend to come out best after a hot streak aren’t the ones with the spiciest forecasts.
They’re the ones who treat a strong run as a reminder to update the process, not the prediction:
they rebalance, they revisit their time horizon, they make sure emergency savings is solid, and they keep contributing.
Their “experience” is less dramaticand that’s the point.
In investing, the goal is not to feel smart every quarter.
The goal is to still be invested (and sane) when the next decade shows up.
