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Why investors should recalibrate their outlook to shun recency bias in 2019

14 February 2019

Markets are forward looking so investors should be too, according to Fisher Investments chief executive officer Damian Ornani.

By Damian Ornani,

Fisher Investments

2018 tested many investors with a more turbulent course than 2017 – and disappointing returns to boot.

One recent study showed that, in US dollar terms, 90 per cent of major asset classes posted declines in 2018 through mid-November.[i] And that was before December’s swoon.

Such drops tempt many to think 2019 will be similarly bleak, as investors extrapolate recent market movement into the future. In my view, though, this mindset risks your financial health.

Markets look forward, not back, and yesterday’s market movement doesn’t predict today’s or tomorrow’s. One of investors’ greatest challenges is to think like markets – assessing the road ahead – uninfluenced by recent angst.

The recent past often colours investors’ emotions and memories, causing them to view the future through the lens of what they just experienced. Psychologists call this recency bias.

For investors, I would also call it a risk. The last day’s, week’s or month’s experiencereturns, volatility, fearsis often front of mind. Whilst this is normal and understandable, if you let your emotions sink or swim with the market, it can lead to reactionary investment decisions: to dump what has hurt and chase what held up better, seeking safety after markets fall.

If markets were serially correlatedmeaning yesterday’s movements impacted today’s and tomorrow’sthen this wouldn’t be an issue.

Trouble is, they aren’t. Take 2017’s smooth ride to stellar returns and 2018, for example.

Just the same, projecting last year’s experience into 2019 fails to take markets’ lack of serial correlation into account. This can set you up for repeat disappointments: missing rebounds after dips; perpetually chasing better returns; sitting sidelined and uncertain about how to put your retirement savings plan on a sustainable and viable track. Recency bias can jeopardise your financial goals.

Whilst the past isn’t predictive, history is an instructive guide. From a bird’s eye view, it shows how recency bias trips up investors and how to overcome it.

Similar bouts of volatility erupted in 2011 and 2015 and also coincided with meagre global equity market annual returns. Yet world equities resurged thereafter.

Using the S&P 500 in USD for its long available history, there have been 26 distinct periods since 1925 when cash has outperformed equities and fixed interest on a trailing 12-month basis – the last ending January 2016.[ii]

During bull markets (10 of those 26 times), shares subsequently rose – quite strongly, 22.8 per cent on average over the next 12 months, as measured by S&P 500 total returns.[iii] During bears (16 of 26), shares still rose half the time over the next 12 months, edging cash on average.[iv] So in all year-long periods when ‘cash was king’, nearly 70 per cent of the time after it was dethroned.

Of course, this doesn’t mean cash will necessarily falter relative to equities and other assets in 2019. But it should be a sharp reminder cash’s historical reigns have been short-livedand you shouldn’t extrapolate.

So instead of automatically presuming worse times lie ahead in 2019 because 2018 was disappointing, ask yourself: What forward-looking reason do you have to expect continued poor returns?

Then ask yourself if your reason actually constitutes new news. If not, a third question: To what extent do markets already reflect this information?

These questions should force you to think forward and strike most widely discussed, backward-looking information.

The future is what matters now. Markets are always evaluating the next thingits probable impact on future scenarios against what has already been priced in.

They aren’t infallible; after all, they are moved most by surprise. But most often, they do efficiently price in all widely known information. Weighing events as they evolveand how everyone else is weighing them, too—bears more fruit than pondering what has passed. It is past.

It can be difficult to shake jarring events fresh in memory, but markets don’t dwell.

Acting on what already happenedwhen markets have moved onisn’t a great way to invest going forward. To keep the past from carrying you away from your financial goals, always look ahead, no matter how compelling the rearview.

Damian Ornani is chief executive officer of Fisher Investments. The views expressed above are his own and should not be taken as investment advice.


[i] “No Refuge for Investors as 2018 Rout Sends Stocks, Bonds, Oil Lower,” Akane Otani and Michael Wursthorn, The Wall Street Journal, 25/11/2018.

[ii] Source: Global Financial Data, Inc., as of 20/12/2018. S&P 500, 10-year Treasury Note and 3-month Treasury Bill (cash) trailing 12-month total returns, January 1925 – November 2018. To group cash outperformance into distinct periods and avoid double-counting, we took the 145 rolling 12-month periods of cash outperformance and grouped them into 26 distinct periods. Some contain months in which cash briefly stopped outperforming over the trailing 12 months—for at most 3 months—but resumed outperformance thereafter.

[iii] Ibid. Average forward 12-month S&P 500 total return after cash outperforms during bull markets, January 1925 – November 2018.

[iv] Ibid. Average forward 12-month S&P 500 total return after cash outperforms during bear markets, January 1925 – November 2018.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.