Bank stock history shows overreacting to recent market events puts investors in peril

financialpost.com:

What if I told you that there is a magical, totally liquid investment that has never had a negative five-year rolling return over the past 17 years and has produced an average annual return of over 11 per cent during that time, including the great financial crisis of 2008, the COVID-19 market meltdown of 2020 and many other negative events along the way?

As it turns out, this investment does exist and it reliably pays ever-increasing tax-efficient dividends to investors, is priced in Canadian dollars and is available to anyone reading. What is it? It’s the Canadian banks. The same banks that rise and fall in value with every macroeconomic event; the same banks that are the subject of countless analyst buys and sells; and the same banks to which virtually unlimited bandwidth is devoted by a seemingly countless number of investing pundits.

The thing is, to achieve those returns, it requires not daily analysis, not the consumption of every analyst’s latest missive, not a fancy trading algorithm and not even a trader’s mentality. It requires patience, a little intestinal fortitude when the latest crisis hits and a long-term view of history, quality and performance.

Why are so few investors able to tune out the noise and achieve these returns for themselves? The answer lies in an area of behavioural finance commonly referred to as recency bias, where individuals tend to give disproportionate weight to recent information or events over historical performance and data, leading to decision-making that is faulty due to its short-termism.

Ask the average investor (we’ll leave the traders out of this discussion since their mission is entirely different than that of a true investor) what their investment time horizon is and they’ll