Skip the Two Day Old Donut

By Geoff Schaefer

Geoff is a Wealth Advisor with Intergy Private Wealth. He writes for The Steadfast Fiduciary to help people live with an abundant heart, open mind, and boundless generosity.

October 20, 2022

You ever eat a donut that is a couple days old?  The decision is immediately regrettable.  It’s a dry tasteless bite that cost you 500 calories on the day. For some reason you envisioned the fresh donut minutes out of the donut shop’s doors and realize you should have just ate it when you originally bought it or done nothing at all.

This feeling can be found in the stock market all of the time. Whether the market is going up, down or sideways, we always hear of the one thing that has done well- that will obviously keep doing well.  Recency bias is a cognitive bias that favors recent events over historic ones. It gives greater importance to the most recent event rather than to the event most based in fact and logic.  For investors, this can be a major pitfall.  John Bogle once wrote, “Buying funds based purely on their past performance is one of the stupidest things an investor can do.” Now Mr. Bogle was rather blunt with that observation, but nonetheless true.  Falling into a recency bias and performance chasing is a dangerous game for investors to play.

In recent months we have heard about the resurgence of gold, various commodities, energy companies, etc.  This note is not meant to go into the merits of any of those investments individually, but rather to highlight recent events.  Jim Cramer, yahoo finance, Wall Street journal editorials, and other financial media have all touted the continued outperformance these assets will see and that investors need to consider moves to reallocate towards these same funds.  After all, energy was only one of two sectors in the S&P 500 to be positive through the first half of the year. Could this not be more obvious? Our recency bias would tell us yes, the numbers would say something quite different.

Here is the energy ETF you should have piled your life savings into in early summer.

 The one destined to continue to outperform the rest of the market.  It is down over 23% from the highs while the market as a while is down only 13%.  Those highs were in June of this year: the same time energy and natural resources were bringing in more assets than any other US equity sector.

The examples of this could go on and on. Investors chase performance.  To circle back to Jack Bogle in this conclusion, he was also quoted as to saying, ““The greatest enemy of a good plan is the dream of a perfect plan.” Stick to the good plan.”  Performance chasing and recency bias are human nature, so awareness of them is key. What is also key is to understand the plan is not the best performance.  We will never achieve that consistently  in the long run. To expect that is to assume to know the future and to base the plan on the performance of a stock account is to say that the stock account takes priority to all else in our lives.  As we know all of our clients, we know this to not be the case. Investment plans are built on the backs of solid financial plans which are designed to reflect ones unique values and priorities. To deviate from the investment plan because of a news article should bring into question if the plan ever accurately reflected your values in the first place. Donuts are great and hopefully you all treat yourself to one now and then.  Should you have a diet made up of 50% donuts? Probably not.  Should you eat that three day old donut because you were told how amazing the fresh one was?  I hope after this little essay you think twice.

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