To predict the future, look beyond the recent past

By Steve Dinnen

Are you a victim of recency bias? Or perhaps an instigator? You can be either or both. It happens to the best of us — in life, in sports, in school, in work and in the investing world.

Recency bias is the tendency to overemphasize the importance of recent experiences or the latest information we possess when estimating future events. Recency bias often misleads us to believe that recent events can give us an indication of how the future will unfold.

Here’s an example from Schwab: In 2021, real estate was one of the best performing sectors in the S&P 500 Index, delivering an annual return of 46%. A client who subsequently loaded up on real estate stocks may have been disappointed that the sector dropped 26% in 2022.

To combat recency bias, Schwab said its advisers help their clients take a broader view, to see how markets move over time.

Personally, I had an adviser with a different firm suffer from a bad case of recency bias when he tucked me into a Unit Investment Trust that increased 12% over three months. He predicted it would climb 48% for the year, but I sold it at a 5% loss.

So you’re on your own here. Just remember that recency bias is real, and it doesn’t care about you.

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