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Don’t Base Today’s Investments On What Happened Yesterday

Don’t Base Today’s Investments On What Happened Yesterday

The 2014–15 winter was an extra-cold, extra-snowy one for the Northeastern United States. What does that tell us about this coming winter? Well, snow blower sales in this region will probably be off the charts. Why? Because most folks assume this winter will bring more of the same. There’s no meteorological basis for that guess—just the human tendency to expect more of the same.

Generator sales spiked after Superstorm Sandy for the same reason. The odds of a similar weather system hitting the region the following year were probably incredibly small. However, it’s human nature to expect repeat performances.

This assumption has a name: The “recency bias.” It refers to the fact that most of us tend to use our most recent experiences as the standard by which we decide what we think will happen in the future. It’s a shortcut our brains use to simplify decision-making—and unfortunately, it can trick us into making not-so-great choices.

Your Mind and Your Money

We see the recency bias a lot in investing decisions. When the market is doing well, some investors may tend to get overconfident and assume that positive returns will continue indefinitely. On the other hand, when the market is down, we see many investors who are sure the financial world is going straight off a cliff.

The bias result we have seen is that when one particular asset class does well, many investors tend to keeping buying those stocks, which bids up the price of that asset class. Remember the dot-com boom/bust of the ‘90s? We believe a lot of that can be attributed to the recency bias (and a bit of the “follow-the-herd” mentality): I keep hearing in the news that everyone is making a killing with tech stocks, so I should invest in them, too—they’re going to continue to be “hot.”

The Overlooked Option: Foreign Stocks

Today, we see a recency bias related to U.S. stocks. The U.S. stock market (S&P 500) has outperformed foreign markets (MSCI EAFE) since 2009 (Source: Bloomberg). As a result, we believe many investors assume that success will continue, and buy even more U.S. stocks at a very high price. However, many veteran investors know that you never want to buy high; you always want to focus on buying an asset class when it’s on sale. Second, savvy investors assume that what goes up could eventually go down. They want to be diversified enough to withstand a market correction.

Also, the recency bias leads people to invest only in familiar territory—which in this case scenario is U.S. stocks. This bias puts blinders on our choices and causes us to pick among fewer investment options. However, I believe that international stocks are a great buy right now. Looking globally for undervalued stocks and buying them now may be a good diversification choice for many investors. I always tell clients: If you’re comfortable with every investment in your portfolio, you are probably not well diversified.

Outsmarting Your Assumptions

We believe the first step to overcoming the recency bias is just knowing that it exists. Now you do. The second step is to ask yourself: Am I investing in this asset class based on how it’s done recently? If you’re unsure, talk to your Wealth Advisor. He/she has access to RegentAtlantic’s valuation model for each asset class and can strive to offer objective counsel on whether you’re falling prey to your shortcut-loving brain.

The moral of our story: Snow blowers are great tools. Buy one this year if you think you’ll need one. In our opinion don’t invest in a super-strength, Minnesota-weather-approved snow blower because you assume we’re in for another bad winter. Instead, diversify your tools so you’re also ready for rain or a mild winter.

Our climate is unpredictable—as are stock markets. We believe if you’re ready to weather whatever kind of winter or financial market rolls around, you’ll be just fine.

 

Important Disclosure Information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable. Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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