{"id":3012,"date":"2015-11-23T20:38:48","date_gmt":"2015-11-24T01:38:48","guid":{"rendered":"http:\/\/162.223.13.186\/~zacksim\/recency-bias-undermining-returns\/"},"modified":"2022-02-26T13:23:02","modified_gmt":"2022-02-26T13:23:02","slug":"recency-bias-undermining-returns","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/recency-bias-undermining-returns\/","title":{"rendered":"Recency Bias Undermining Returns?"},"content":{"rendered":"

Fort Meyers, FL asks…<\/strong><\/p>\n

I received an inheritance and was going to invest, but the market\u2019s volatility and downward turn has me concerned so I\u2019m waiting. Is that a good idea?<\/strong><\/p>\n

Great question – and, an important one given the potential impact one’s actions, or inaction, can have on long-term returns.<\/p>\n

In August 2015, when the market plummeted, this question arose for me daily –\u00a0and, the market\u2019s recovery since has essentially answered the question.<\/p>\n

If you have conviction about the market\u2019s direction over the next 12 months (bull or bear), and the money you\u2019re thinking about investing is for the long-term, then to me it makes sense to put it to work. Trying to time the market is a mistake, and odds are you\u2019re going to get it wrong.<\/p>\n

The logic behind \u2018waiting to invest\u2019 during downside volatility is flawed. By definition, it means the investor is waiting for prices to recover (meaning stocks are more <\/em>expensive) before they feel comfortable enough to buy. That would be like skipping a sale at a department store in favor of waiting for prices to go back up \u2013 who is going to do that?\u00a0 Not me!<\/p>\n

The terminology that best describes this mindset is \u201crecency bias.\u201d It refers to an investor\u2019s tendency to think that the trends and patterns we observe in the recent past will continue in the future. In the case of this past August, \u2018recency bias\u2019 convinced some investors that downside volatility would persist for several weeks or even months \u2013 and that led to cold feet. But, the market doesn\u2019t work that way. Typically, what happens in any given day does not imply what will happen the next. That\u2019s why it\u2019s so important for investors to focus on thetrendlines, <\/em>not the headlines.<\/p>\n

For long-term investors, there is also the fact that missing the best days in the market can significantly impact your total return over time. In a 20-year period from 1995 through the end of 2014, an investor that stuck with stocks (S&P 500) throughout could have expected a $10,000 investment to grow to $65,543 \u2013 a 9.85% annualized return. But, if that investor missed just the 10 best days in the market (which often happen very close to the worst days that spook investors), the $10,000 investment would be worth much less \u2013 growing to only $32,665. Miss the 40 best days, and you actually lose money.<\/p>\n

So, when it comes to trying to time the market, remember what that could cost you. I don\u2019t think it\u2019s worth it. This is especially the case if you have long-term growth objectives – in that scenario you are almost certainly better off spending as much time invested as you can. The numbers above prove as much.<\/p>\n","protected":false},"excerpt":{"rendered":"

Fort Meyers, FL asks… I received an inheritance and was going to invest, but the market\u2019s volatility and downward turn […]<\/p>\n","protected":false},"author":1,"featured_media":4257,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[66,71],"tags":[],"class_list":["post-3012","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitchs-mailbox","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3012","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=3012"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3012\/revisions"}],"predecessor-version":[{"id":11487,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/3012\/revisions\/11487"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=3012"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=3012"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=3012"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}