Here's how making poor investment choices is like watching classic thriller 'Jaws'
Investors 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.
Investor 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.
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Recency 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.
Here'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
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