Recency Bias

Dear Client,

Time and time again it has been preached to investors, like you, to “buy low and sell

high.” So why do many investors often end up doing the opposite? Unfortunately, people fall victim to “recency bias.” This occurs when an individual thinks that what has happened in the recent past will continue to occur in the future. In other words, recency bias is another way of saying that people expect the future to be a predictable version of the recent past. While this sentiment is not 100 percent accurate, it may be one of the reasons you feel hesitant to continue investing in the market.

During times of market uncertainty, when emotions are high, fear that the poor returns will continue indefinitely can prevail over sound investment advice. Your emotions and recency bias are compounded by constant media noise which can make it difficult to think clearly.

It is important to remember that market crises are not a phenomenon, nor are market recoveries. The markets long-term performance has been resilient. Even during down market cycles, it is important to stay patient and maintain a well-diversified portfolio.

During challenging times, many investors inadvertently deviate from their original investment strategy and search for a perceived safer investment. This action can lead to missed opportunity when there is a market recovery.

Balancing facts against media opinion can help you make clear and thoughtful decisions.

From January 1, 1926, through December 31, 2007, the S&P 500 Index has only had two negative 10-year rolling periods and zero negative 15-year rolling periods.1 The evidence shows that the longer you remain invested, the greater the possibility of generating positive returns and reaching investment goals. The biggest mistake you can make is to sell your investments after the markets have significantly dropped and then buy back into the markets after it has rebounded. You will be much better served by keeping focused on your long-term investment plan and not allowing yourself to be persuaded by daily market fluctuations.

While there are many reasons that may keep you from investing, there is one good reason to continue. Historically, the market goes up more than it goes down. Since 1926, there have been a total of 59 years of positive stock market performance versus 24 years of negative performance.2 Through wars, terrorist attacks, failing corporations and a plethora of other major events, the stock market has rebounded every time. This is why it is crucial to remain disciplined and stick with your investment strategy.

When the market experiences down years, it is important to focus on the big picture.

While we are experiencing tough market conditions, there will be a light at the end of the tunnel. I am here to help you through these tough times by discussing your investments and helping you stay on track to meet your financial goals. Warren Buffet once said, “The most important quality for an investor is temperament, not intellect.”3 That is why it is imperative to have a clear vision of your long-term financial plan and not be influenced by recent market swings.

Please contact me at 858.752.1726 today to schedule a time when we can discuss your holistic wealth management plan.

Sincerely,

Dion Gouws, CPA

1 Munder®. “Time Not Timing.” Challenging & Volatile Markets: Historical Perspective.

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.2 Munder®. “The Market Goes Up More Than It Goes Down.” Challenging & Volatile Markets: HistoricalPerspective. <

www.munder.com/challengingmarkets.pdf

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.3 Wagner, Hans. “Financial Wisdom From Three Wise Men.”

Investopedia.com

. 26 May 2009.<

http://www.investopedia.com/printable.asp?a=/articles/06/threewisemen.asp

>.
Past performance is no guarantee of future results.