The more I study my industry, the more I’m noticing that the news of pessimism, fear, and greed, are always in cycle and at play. The more I identify these strategies and share them, I know I must sound like a broken record. The sensational opinion laded broadcasts are starting to actually become a daily dose of comedic relief for me. The amusing techniques and the different strategies they used to try to keep people in the throes of a mindset of fear are detectable to the astute observer. Have you heard of Recency Bias?
Recency bias seems to be the latest en vogue marketing technique to keep people in a transactional induced mindset, hoping to avoid loss and financial investing mistakes. Recency bias is a term used to describe the market experiencing a rapid short-term upward or downward motion. This short-term track record could be used to create transactions in investors’ accounts, when in fact in most cases it is better to just stay to the course. Prudent investing would dictate that past performance, especially recent past performance, has nothing to do with how stocks will perform in the future. Research clearly shows that markets are random in the short-term and upward moving over the long run.
Fortunately, and very interestingly, once investors are made aware of the very existence of the phenomenon of recency bias, they are better equipped to resist its lure. A global broad-base, highly diversified portfolio, tempered by short term bonds according to the amount of risk acceptable, is the remedy for speculation and gambling. Keep in mind that Optimism, Pessimism, Fear, and Greed, are not your friends. Manage them over the long run, and one would have a much greater probability of reaping the rewards of the stock markets.