Recency Bias Can Derail You

Recency Bias Can Derail You

By Larry Swedroe For the 10-year period 2008 through 2017, a very wide dispersion in returns has existed in markets. As the following table shows, U.S. stocks far outperformed international stocks, and growth stocks outperformed value stocks. Given these results, it’s no surprise I have been getting lots of queries from investors about their international equity investments. Any time an asset class does poorly—even for a few years, let alone a decade—a significant number of investors will question why they own that asset. One particular inquiry I received involved the fact that international equities not only had underperformed domestic equities since 2009, but they crashed in 2008. Just when the benefits from diversification were needed most, they failed to materialize. As a result, the investor in this case doubted the reason for including international equities in his portfolio. Recency Problem Among the errors discussed in my book, “Investment Mistakes Even Smart Investors Make and How to Avoid Them,” is one called recency. Recency is the tendency to overweight recent events/trends and ignore long-term evidence. This leads investors to buy after periods of strong performance (when valuations are higher and expected returns are now lower) and sell after periods of poor performance (when prices are lower and expected returns are now higher). This results in the opposite of what a disciplined investor should be doing: rebalancing to maintain their portfolio’s asset allocation. The problem created by recency is compounded when international stocks underperform, greatly increasing the risk that an investor will commit a mistake. This occurs because of another common error: confusing familiarity with safety, which leads to the well-documented,...
Now and Then

Now and Then

Dave Goetsch, Executive Producer of  The Big Bang Theory, reflects on his investment experience in the recent market downturn and contrasts his new perspective with memories of the 2008-2009 financial crisis. Seeing all the recent headlines about the sudden downturn in the stock market has transported me back to February of 2009, when I was close to despair. It’s striking how different I feel now. In February 2009, the stock market was down around 50% from its high, and everyone seemed to feel like the sky was falling. I was familiar with this state of panic because my relationship to the financial markets was that I didn’t trust them. They were always going up and down in ways no one could predict, and I couldn’t trust those folks who said that they could anticipate what was going to happen. So when the market went down, I went down with it—sinking into a depression, knowing there was nothing I could do. What a difference nine years make. I haven’t changed because the stock market rebounded. I changed because I learned that there was a different way to think about investing. I was right not to trust those people who thought they could predict what was going to happen in the markets, but I was wrong in thinking that there was nothing to do. I’ve learned that I can have a great investment experience if I just accept a few simple truths. I have to understand the uncertainty of the market. The stock market, as measured by the S&P 500 Index, has returned about 10% per year over the last 90 years,1 but...
Taxes Are Everywhere, But So Are Planning Opportunities

Taxes Are Everywhere, But So Are Planning Opportunities

By William Morgan Start funding an education savings plan once you begin making plans to start a family. 529 plans have become more flexible. You can now use them to pay for kindergarten through 12th-grade tuition, and not just on college expenses. Check your home state to make sure it has updated its rules to allow K-12 withdrawals as qualified distributions. The goal of beginning to save early is now even more important. Understand the new tax implications on purchasing a home. State and local taxes — including real estate taxes — are now capped at $10,000. Mortgage interest is limited to the amount of interest on qualified debt of $750,000. This means that buying a new home may now come with less tax savings, making it more important to understand your specific circumstance. When making charitable contributions, consider using a donor-advised fund to lump charitable contributions in one year, then distribute the funds to charities over many years. This strategy may allow you to itemize deductions in one year and then take the standard deduction in subsequent years, enabling you to achieve a tax benefit that you otherwise might not receive. Worrying about federal estate taxes may no longer be a concern with the individual lifetime estate tax exemption nearly doubling from $5.49 million to $11.2 million. When considering making lifetime gifts, it is critical to consider how to optimize the benefit from the step up in basis to reduce a family’s total tax bill. When someone receives an inheritance, the cost basis of the property is stepped up to the fair market value at the date of death. This eliminates any taxable...
You’ve Done Well Accumulating Wealth. Are You Prepared to Spend It Down?

You’ve Done Well Accumulating Wealth. Are You Prepared to Spend It Down?

By Joe Delaney We’ve all heard the story of Icarus, who flew on wings of feathers and wax until he got too close to the sun. What happened next was something Sir Isaac Newton would codify into a natural law centuries after Diodorus wrote the iconic tale. What goes up must come down. Think of yourself as Icarus as you are now accumulating wealth. There will inevitably come a point when your wings will give out and you will begin a financial descent. The question is not whether it will happen, but rather, will you make a controlled descent, or fall flat? PREPARE FOR DESCENT When you retire, your accumulation period usually ends and your income will likely dip. We call this the “black out” period. At age 70 ½, your RMD (Required Minimum Distribution) period, or “spend-down period”, begins. This is the age at which the government mandates RMDs so it can finally tax those gains from tax-deferred accounts, such as your IRA, 401k, etc. Will there be enough for you and your spouse? How much will be left for your children? How charitable do you intend to be in these final years? The time to ask those questions is not in your 70s. It’s now. We have found that, while the individuals who come to us with retirement questions are often smart, forward-thinking people, they tend not to be aware of some of the strategies they could be putting in place that will make their spend-down period far more successful. The key is understanding the tax nature of your investments and putting the assets in the right...
Are You a Complainer, Consumer or Contributor?

Are You a Complainer, Consumer or Contributor?

By Tim Maurer Are you a Complainer, Consumer or Contributor in the workplace? In Adam Grant’s book, Give and Take, he differentiates between three types of people–Givers, Matchers and Takers–categorizations that have implications in both our personal and professional lives. But as an educator–and student–in the realm of financial advisory development, it struck me that Grant’s triumvirate may have an analogous trio of traits that accurately describes our posture toward learning how to be better professionals. (And people.) Complainers I’m sure you’re not a Complainer, but I’ll bet you know how to spot one, whether that person is a friend, colleague or client. Complainers tend to have an eye for the imperfection in everything, and they almost seem to enjoy pointing it out. They seek to disagree and magnify their discontent. They capitalize on opportunities to provide criticism, but it’s rarely constructive. And they also tend to be vocal about it, creating dissatisfaction for others where it may not have previously existed. Consumers Consumers aren’t a perfect parallel for Grant’s reciprocity-seeking Matchers, as they likely have more taking than giving tendencies. But like Matchers, who represent 56% of the population in Grant’s studies, I wouldn’t be surprised if a majority of those pursuing continuing education opportunities are Consumers. You might be a Consumer if you don’t complete evaluations at the end of conference sessions (or you just put a three-out-of-five for every category with no comments). You’re not as likely as a Complainer would be to speak up about your points of disagreement, but you’re also unlikely to offer positive feedback, perhaps carrying yourself with an air of apathy or...