Are you fighting the last war? ‘Recency’ bias can hurt long-term returns

YOU most probably remember what you had for breakfast this morning. Can you recall, though, what you had for breakfast a week ago? A month ago?

Many of us find it easy to recall events that occurred most recently, or the last thing someone said at the end of a meeting – an outcome psychologists call the “recency” bias. However, it is much harder to recall what occurred further back in time, or in the middle of a particularly long meeting, unless one took the effort to take notes and commit key points to long-term memory.

For financial-market investors, this can be a particularly troubling bias that can work against us in making good investment decisions. Today, for example, many of my conversations with colleagues and clients are very focused on the first half of the year and whether the gloom we experienced in the form of a correlated fall in both equities and bonds is likely to continue for the foreseeable future. Many have asked whether one should indeed just “wait out” this uncertainty in the supposed safety of cash – an approach that history would caution can significantly hurt long-term returns and the preservation of wealth, especially during times of high inflation.