We’ve talked in an earlier blog about how cognitive biases get in the way of success. See this article.
Let’s not forget, investors are human, and many times act emotionally based on their biases. It’s who we are as individuals. Let’s not forget, investors are human, and many times act emotionally based on their biases. It’s who we are as individuals. It’s taken us decades to become who we actually are (not how we see ourselves). It’s very easy to come to conclusions and make decisions without giving much thought to the bias. We’ve often talked about “recency bias”. This is the tendency to weigh the latest information more heavily than older data. Investors often think the market will always look the way it does today or continue to perform as it did recently and make unwise decisions.
It’s taken us decades to become who we actually are (not how we see ourselves). It’s very easy to come to conclusions and make decisions without giving much thought to the bias. We’ve often talked about “recency bias”. This is the tendency to weigh the latest information more heavily than older data. Investors often think the market will always look the way it does today or continue to perform as it did recently and make unwise decisions.
We bring this up now, as investors react to their returns from previous year. Some follow their returns closely while others follow less closely (e.g. annually). Many investors open their year-end statements in January and review the results from the previous year. While there is absolutely nothing wrong with that, it is how they react to those results that matters. If the markets have had an outstanding year beating long term averages, money starts to flow into RRSPs and TFSAs. This is a case of buying high because you expect what happened recently (last year) to repeat and happen again this year. The same can be said for negative years. If last year was a negative year, investors will pull back on their investments this year. The industry that tracks contributions every RRSP season (January and February) will likely announce fewer contributions after a negative year. This will again confirm “recency bias” is alive and well.
So, what can you do to prevent making this mistake? It’s simple, but not easy. Stick to your plan and don’t change anything. You might look back next January and see the results, but more importantly, you might be cured of this bias once and for all.
For more information, please feel free to give us a call or send us an email.
