John Grobe, Federal Career Experts
You’ve seen the investment disclaimer before – past performance does not guarantee future results. The reasons for stating this are clear, the human mind is given to detecting patterns and extrapolating and that can sometimes spell big trouble when it comes to investment decisions, especially if you are late to the party.
Consider a couple of dire memes on offer now:
– If inflation continues at its current pace, a dollar will be worth far less and those on fixed incomes will be forced into poverty.
– If the stock market continues to decline at its current rate, our investments will not support us in retirement; in fact, we may receive less than we put into our accounts.
If – Then. We see these predictions in financial articles that appear in business magazines and in the supermarket tabloids. Sometimes it seems like the news cycle is designed to encourage panic. If, however, we are aware of recency bias we can avoid getting spooked by what is happening now.
Recency bias is a situation where we put undue weight on recent events and is common among most people. One example of putting too much weight on recent happenings was a tongue in cheek article that I remember from about 20 years ago. This involves Elvis Presley, and it goes like this:
• Prior to 1977 there were no Elvis impersonators because “The King” was still alive.
• Impersonators began to appear immediately after his death and, by the mid 1990’s, they were appearing at Mall openings and even block parties. Remember the sky-diving Elvis impersonators in the movie Leaving Las Vegas?
• It was suggested that if this rate in the increase of Elvis impersonators was to continue, by the year 2050, one in every four Americans would be an Elvis impersonator.
In the late 1990s, those TSP investors who suffered from recency bias, expected to have a huge mound of money available to them. After all, the S&P 500 went up by 34.11% in 1995, 20.26% in 1996, and 31.01% in 1997. Little did they expect the index to go down by 10.14% in 2000, 13.04% in 2001 and 23.37% in 2002. If you would have asked an investor what they expected the future to bring back in 2002, I bet their scenario would have been much different that it was only five years earlier in 1997.
So, next time you see an article or a post warning you of what would happen if the current situation were to continue, ask yourself what the odds are of it actually continuing.
And it’s worth noting that many retirees commonly over estimate market volatility, and under estimate their years in retirement.