Market Distortions and Angst

Even the most thoughtful investors may be impaired by recency bias. Recency bias is a state of mind where our views are influenced by what we have experienced most recently.  Being a successful investor entails remembering the purpose of our investment, keeping our eye what we are trying to achieve, and making wise decisions in spite of the current uncertainties faced in the market that may cause emotional discomfort. If it is known that we need a certain level of savings to provide for our retirement income needs, say, eight years from now, staying in cash today may comfort emotions driven by fear, but in 8 years you won’t be ready, having fallen short of your needs, and we will be having a very different conversation….. Future retirees need the compounding growth that is possible by participating in the markets.  During periods of increased volatility we can lose sight of our purpose for investing. While past performance is no guarantee of future results, historical performance does illustrate that the market has experienced similar volatility before and eventually recovered. Recency bias colors our outlook and expectations of the future; and can clearly influencing our views and investment behavior.  This can reveal itself in different ways: during periods where average annualized returns post in the 20s, investors allow themselves to be utterly unrealistic in their expectations of future returns. Conversely, recency bias causes investors to bail out, and stay out, when the market has cycled downward, only to refuse to re-enter the market missing a rebound spanning years. Recency bias tends to work against the most basic tenet of investing: stay disciplined, buy low, sell high. We don’t know how the markets will perform next month, but we do know that we don’t want to make investment choices based upon the Fed raising rates this week or next, or China’s economic slowdown. Our investment strategy should not shift due to market volatility but only when our goals, need horizons and risk tolerance changes.

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