Don't Be Blind To This Bias. A Reflection on Q4'19 Markets
What a year! The S&P 500 total return for 2019 was 31.5% But do you remember how much the market sank at the end of 2018? Do you remember the 13% decline in that same index in the last quarter of 2018? Recency bias is a crucial behavior an investor needs to understand to make the correct decisions for their investments.
Just because 2019 was such a great year does not mean 2020 will be too. Recency bias is when a person most easily remembers something that happened a short time ago while failing to remember something that occurred further back in the past. This bias can influence your decisions.
For example, because 2019 was such a successful year, a prospective investor may not pause to understand what may happen to the principle of their investment. They rely upon 2019's performance to inform how they invest their 401k, 403b, IRA, or hard-earned cash savings. And they may invest in a portfolio that is riskier than they genuinely know because they are using there most recent experience with markets to inform their decision.
Risk is always present. To the benefit of markets, we see progress in the trade war between the U.S. and China, low unemployment in the U.S., and a non-inverted yield curve (inverted yield curves are leading indicators to recessions). However, we still see risks that may play in future volatility. These risks include political uncertainty in the U.S. and abroad. Additionally, central banks around the world remain in a tight spot if there is an unforeseen slowdown. And although global manufacturing inched up recently, it is still relatively slow.
I like presenting points as both a pessimist and optimist at the same time. From my research and experience, it is hard to know what the future holds. So to navigate the future unknown, investors should:
1). Own a portfolio where the risks and returns align with their risk tolerance, requirements, and capacity.
2) Keep investment costs low
3) Maintain a tax-efficient portfolio
4) Invest for the long term, recognizing there will be ups and downs along the way
Please find the link below to a complete reflection on the Q4'2019 market performance and news. If you have any questions, feel free to reach out!
Have something on your mind? Feel free to schedule a free call with Nate.
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Note: Investing involves risk. Past results do not guarantee future returns. This content should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice. The performance of an index is not representative of any particular investment, as you cannot invest directly in an index.