Author: Brent Lemieux CFA® CPA
No, I’m not talking about your political biases even though we all have those whether we care to admit it or not. I’m talking about your investment biases, in particular “recency bias”, and how it negatively impacts our portfolios in good times and scary times.
What is recency bias?
Recency bias relates to our brains ability to more easily recall, and thus place much more importance, on events that have happened recently (or are happening now) as opposed to events that occurred a long time ago.
Why is this bad?
This may cause us to make behavioral investing mistakes. We get greedy and buy the stock that has been performing well lately. We get anxious and we sell the stock that has been beaten up. We place far too much importance on how the current news cycle affects our LONG-TERM investments, when in reality it has almost nothing to do with our retirement plan.
What does this have to do with the election?
Many people feel that one candidate or both are unfit to lead our nation. The narrative goes that if they are elected they will cause the stock market to fall off a cliff. Certainly this is possible, but it is unlikely and has nothing to do with your long-term portfolio. We’ve written in the past about why you shouldn’t seriously alter your investment plan because of the election, but it’s worth reiterating as the election draws nearer and the news cycle gets uglier.
Our current situation often seems a lot better or worse than it actually is. When in reality, it is a lot more average. This goes for elections, hot investment trends, and recessions. Our advice is to not buy into the hype or the fear, and keep focused on a sensible investment and savings plan for the long-term.
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