Recency bias defined as the tendency to overweight the importance of recent events over events further back in history. For instance, after 4 months of Florida summer, I’m likely to sell my leather jacket for $5 because I can’t imagine I’ll ever need it again. Laziness is defined as using cruise control, according to my grumpy grandfather.
Unfortunately, this recency bias and laziness can color our portfolio decisions as well. You’ve no doubt heard the mantra that it’s a fools errand to try to beat the index. Typically, they are speaking about the SP500 index. While you can’t invest directly in an index you can invest in index funds. Efficient market theorists point out that portfolio allocation is straightforward and simple. Put 60% in an equity index and 40% in a bond index. You can set it and forget it.
And they’re 100% correct, some of the time. From 2009 to 2021, that passive allocation brought in about 9.4%. In fact, from 1979 to today a 60/40 brought us roughly 10.2%. Case closed?
Of course not. Which is why every time you see the performance of a mutual fund or stock, we are required to say, “Past performance is no indication of future results.”
There have been several periods where a 60/40 portfolio actually gave you a lost decade. Long periods where you either lost money or lost buying power because you didn’t outpace inflation.
Maybe you should invest like you drive your car. On long boring stretches of highway, cruise control is great. You can set it and forget it. But if it's raining or you're approaching a school zone, cruise control can be a big mistake. So you have to ask yourself, am I willing to set it and forget it? Or should I have a strategy that adjusts to changing market conditions? If you’re interested in talking about a different approach, let’s talk. Click here to schedule a call.