Most of us have experience witnessing “the lane expert” when we are driving. You know, the person who is never satisfied with his current driving lane and is always looking for an opening ahead. For the main, these drivers end up no better off than those who stay in one lane without changing. This same lack of patience can also manifest itself in our financial lives.
It is easy to think that the “investing lane” you are in isn’t as good as the next one. Perhaps the investments in that lane are better . We certainly have witnessed this approach from clients, particularly in periods (like now), where there are fairly strong performance differences between distinct market segments. Distracted investing can be just as dangerous as distracted driving. Remember, you should invest on purpose, for a purpose.
If you are always looking for the “best” investment at any moment in time, you are falling prey to what is known as “recency bias”. Our brains like patterns and sometimes we imagine these patterns, even where they don’t really exist. “Recency bias” is where you take the recent past and extrapolate this into the future. Markets move in cycles, not straight lines. Over the past 15 years, six different asset categories, (ranging from U.S. Small Value Stocks to 5 Year Government Bonds) have posted the highest returns in a given calendar year. All six of these categories also spent at least one year as the worst performing asset class during the 1999-2013 timeframe. There are no discernable patterns.
Many of us have difficulty seeing these biases in ourselves, yet we recognize them easily in others. After all, we are better drivers than others. We have a blind spot that obscures the truth. Our time tested approach provides a different way. Ready for a real conversation?