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Will the Bear Trap You?

Will the Bear Trap You?

| March 30, 2022

Typically, wildlife conservationists and hunters trap bears. In the stock market, bear markets trap investors who suffer from regency bias. First, let’s define recency bias. According to Wikipedia, “Recency bias is a cognitive bias that favors recent events over historic ones. A memory bias, recency bias gives greater importance to the most recent event, such as the final lawyer's closing argument a jury hears before being dismissed to deliberate.”

A great article came out on March 29 from our friends at Bloomberg. Quoting analysis from Bank of America, they make the argument that the recent 11% surge in the SP500 isn’t necessarily a sign of the stock market healing from recent inflation and geopolitical concerns. Rather, they remind us that shorter term market rallies are normal in a longer-term bear market. Time will tell if they are correct. Here’s a link to the article.

History doesn’t repeat, but it does rhyme. I appreciate the graphic that shows how the stock market can surge even during bear markets. When you are seeing the market go up over a few weeks’ time, you are tempted to see the short term and through the magic of regency bias forget the overall trend. You can see this in the graphic taken from the Bloomberg article below. 

The key to managing your investments is to manage your emotions. And managing your emotions requires a broad understanding of the history of bull and bear markets. If you're ready to apply this approach or learn more, click here.