One of the keys to successful investing is to resist the natural human tendency to extrapolate the recent past into the future. This tendency is known in behavioral science as “recency bias” and manifests itself in investor decisions to buy or sell based on recent market performance.
While there are practical benefits to many of our behaviors, in the investment realm these behaviors can become our worst enemies. Witness the ebb and flow of cash into mutual funds as markets rise and fall. Almost invariably investor euphoria peaks as markets reach new highs just in time for the next major downturn. The reverse is also true as investors capitulate to extended market downturns and bail out of their investments just in time to miss the next upturn.
Successful investing requires the discipline to resist succumbing to behavior that might make us feel good in the near term but can have destructive consequences in the long run. Making investment decisions based on past performance is like driving while looking in the rear view mirror and can have equally fatal consequences for our future financial well-being.
As with safe driving, successful investing requires you to keep your eyes on the road. You’ll have a better chance of getting to your desired destination intact.
Have a great weekend.