Here’s how making poor investment choices is like watching classic thriller ‘Jaws’

by | Jul 21, 2023 | Financial

Stephen Frink | The Image Bank | Getty ImagesInvestors can get swept away by the fear or euphoria of the recent past — and it often costs them financially.”Recency bias” is the tendency to put too much emphasis on recent events, like a stock-market rout or the meteoric rise of bitcoin or a meme stock like GameStop, for example.related investing news These stocks are about to break out, according to the bullish golden cross chart formationYun LiNick Wells2 days ago This high-risk global bond fund isn’t for everyone, but it’s tempting investors with a 10% yieldGanesh Rao3 days agoInvestor choices are guided by these short-term events — which may be counter to their best interests, as is often the case when selling stocks in a panic.More from Personal Finance:’We’re all crazy when it comes to money,’ advisor saysWhy our brains are hard-wired for bank runsThe fear of missing out can be a killer for investorsRecency bias is akin to a common yet illogical human impulse, such as watching Steven Spielberg’s classic summer blockbuster “Jaws,” a 1975 thriller about a Great White shark whose diet revolves more around humans than marine life, and then being afraid of the water.”Would you want to go for a long ocean swim after watching ‘Jaws’? Probably not, even though the actual risk of being attacked by a shark is infinitesimally small,” wrote Omar Aguilar, CEO and chief investment officer at Schwab Asset Management.Fans celebrate the June 14, 2005 release of the Jaws 30th Anniversary Edition DVD from Universal Studios Home Entertainment.Christopher Polk | Filmmagic | Getty ImagesRecency bias is normal, but can be costlyHere’s a recent real-world illustration:The financial services sector was among the top performers of the S&P 500 Index in 2019, when it yielded a 32% annual return. Investors who chased that performance and subsequently bought a bunch of financial services stocks “may have been disappointed” when the sector’s returns fell by 2% in 2020 — a year when the S&P 500 had a positive 18% return, Aguilar said.Among other examples posed by financial experts: tilting a portfolio more heavily toward U.S. stocks after a string of underwhelming performance in international stocks, and overreliance on a mutual fund’s recent performance history to guide a buying decision.People need to understand that recency bias is normal, and it’s hard-wired.Charlie Fitzgerald IIIfounding member of Moisand Fitzgerald Tamayo”Short-term market moves caused by recency bias can sap long-term results, making it more difficult for clients to reach their financial goals,” he said.The concept generally boils down to fear of loss or a “fear of missing out” — or, FOMO — based on market behavior, said Charlie Fitzgerald III, an Orlando, Florida-based certified financial planner.Acting on that impulse is akin to timing the investment markets, which is never a good idea; it often leads to buying high and selling low, he said.”People need to understand that recency bias is normal, and it’s hard-wired,” said Fitzgerald, a principal and founding member of Moisand Fitzgerald Tamayo. “It’s a survival instinct.”It’s like a bee sting, he said.”If I get stung by a bee once or twice, I’m not going to go there again,” Fitzgerald said. “The recent experience can override all logic.”Investors are most vulnerable to recency bias, he said, when on the precipice of a major life change like retirement, when market gyrations may seem especially scary.How to assemble a well-diversified portfolioLong-term investors with a well-diversified portfolio can feel confident about riding out a storm instead of panic-selling, however.Such a portfolio generally has broad exposure to the equity markets, via large-, mid- and small-cap stocks, as well as forei …

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