Yesterday Once More – HumbleDollar

Investing is tricky business, so tricky, most of us have no idea what we are doing or if we think we do, it’s probably not right.

For my part I try and stay long-term focused and to avoid chasing the market. I have a mix of mutual funds, mostly index, bond funds, mostly municipal and three individual stocks, utilities that generate dividend income, one if which is the company where I was employed nearly fifty years and accumulated the shares while working.

Funny thing with this mix, okay not so funny, but predictable, is that when some investments go down, others go up. Regardless where the price goes, the bonds keep paying interest and the stocks dividends. Even my one individual investment that has seen a precipitous decline because it’s related to oil, still kicks off income each quarter.

The result has been that through think and thin somehow my investments have seen a steady increase, partially the result of reinvesting interest and dividends.

Maybe you can do okay if you don’t know what you are doing … or you stick to the basics.

Yesterday Once More

Robin Powell  |  October 30, 2020

YOU’RE SITTING in your favorite restaurant, feeling famished. The waiter arrives and reads a long list of mouth-watering specials. Yet the moment he walks away, all you can recall is the last item on the list. Welcome to the recency effect. In psychology, the recency effect refers to the human tendency, when asked to remember a long list of things, to have sharper recall of the final items. No doubt you’ve experienced this at a party. When introduced to 10 people, you only recall the name of the last one or two.

The recency effect occurs in finance, too, though the consequences can be more serious than forgetting who the man in the blue shirt was. Quite simply, if you’re making investment decisions based on what happened in the financial markets in the last week or the last day, you risk chasing past winners or perceiving as the greatest risk something that’s already occurred and is already reflected in market prices.

We’ve seen that in 2020, with many people turning defensive in March at the peak of the coronavirus crisis, only to see stocks and other riskier assets bounce back sharply in this year’s second quarter. There’s an evolutionary reason for the recency effect. Thanks to our hunter-gatherer ancestors, our brains are programmed to respond to what we perceive as the most immediate threats. At the same time, we are likely to see the best opportunities as those that proved fruitful in the immediate past.

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Source: Yesterday Once More – HumbleDollar

2 comments

  1. To the recency effect, add the investor fallacy “loss aversion”. This is the fear of loss being so strong that it blinds investors, especially amateurs, to the possibility of gain. For instance, those of us whose pensions insulate against the danger of market downturns will often still hold bonds, whose investment returns are dwarfed by those of common stocks. Google “loss aversion” sometime for some interesting reads.

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