What is 'reversion to the mean' and how should it shape how I view hot and cold markets?

Reversion to the mean is the tendency for returns, and asset prices, to drift back toward their long-run averages over time. After a stretch of unusually high returns, future returns tend to be more subdued; after painful losses, future returns have historically tended to be better than average. It's not a law you can time precisely, but it's a useful counterweight to emotion.

Practically, it argues against chasing whatever's been hot and against fleeing whatever's been cold, since both extremes tend to normalize. It's part of why rebalancing works: trimming winners and adding to laggards lines up with the tendency of things to revert. It's also why a scary bear market often precedes strong recoveries. Don't extrapolate the recent past forever in either direction. Build a diversified allocation, rebalance, and let mean reversion quietly work in your favor rather than betting against it.