A bias is defined as;
“Not logical or reasonable”
“…tendencies to think in certain ways that can lead to systematic deviations from a standard of rationality or good judgment”.
Recency Bias refers to our expectation for future returns based on recent past performance. Investors project past returns forward expecting more of the same and then base their investment decisions accordingly.
This explains why most investors invest at the top of the cycle and disinvest at the bottom of the cycle i.e. getting the timing perfectly wrong by buying high and selling low.
The current cycle is once again proving we don’t learn from our mistakes. The average investor is either sitting in cash or even worse switching into cash after 3 yrs of flat returns from the JSE. Three years ago, investors were piling into the market after several years of strong returns and the expectation that this would continue.
Today it is the exact opposite after 3 yrs of flat returns investors prefer to hold cash, citing numerous factors from the ANC elections to the weather as reasons to stay in cash. However, truth be told, it is simply because cash has out-performed the market and investors expect this to continue. 116 years of real (inflation beating) returns from the JSE are simply over-looked, which brings me back to my opening definition of a bias “Not logical or reasonable” – “Deviations from a standard of rationality or good judgment”.
Switching out of the market now into cash is a classic recency bias story, which we mere mortals suffer from. Stand back and try to engage your rational brain before taking a decision, otherwise you will find yourself suffering from another behavioural finances bias called regret.
Mcomm, CFP®, HdipTax
T. 021-851 3746