2 thoughts on “February 15th, 2013”

  1. Aaron Howard says:

    Recency bias means we use our recent experience to predict the future. If the market is going down, we tend to think it will continue to go down. If it’s going up or staying flat during the last few days or weeks we tend to think this trend will continue.

    Most of us benefit from long term investments, relying on moderate to low risk and modest long term growth. Even for those in mutual funds recency bias is important. It’s best to pick a date annually to re-align investments with goals. Often if you adjust your investment in response to recent market conditions you will lose money on average, because this is a business with a great deal of attention from professionals who will easily gobble up any local marginal gains and frequently lock other small investors out from time sensitive transactions until the opportunity is long gone.

  2. Mike Finley says:

    Another fine answer, Aaron. It is very easy to get caught up in what just happened. Here is an example: Gold. Over the last decade gold has been a very good investment and if you were a psychic (a good one that is) you would have invested all of your money into this commodity and made a bucket load of money. Of course, a decade ago the “experts” were telling you to stay away from gold because of its poor return over the previous decade (recency bias at play again).

    What is my point? We must look at the historical returns on an investment as we evaluate whether or not we want to place our hard earned money in that particular asset.

    We MUST focus on how an investment has done over long periods of time. 70 or 80 years is a good period to review. This reduces the effect of recency bias on our thoughts and behaviors. What do we know?

    Gold has been a poor to fair investment over long periods of time. Bonds have not faired much better (but with much less risk). Real estate has done better, but not by much. Finally, stocks. Owning a no-load index fund that owns the market (small, mid and large companies) has provided the best return over time. Did it the last decade. No. Will it this decade. Who knows. Will it over the next 50 years. It is likely.

    Focus on past decades, not the past few years as you identify recency bias and push it aside. Simply own an assortment of index funds that include stocks (for growth) and bonds (for income and reduced risk to the portfolio). You will benefit.

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