If you’re trying to maximize your wealth both for the short term and throughout retirement, it’s important to recognize the role that behavioral biases can play in your decision-making process. Most people are not even aware of the impact that recent news and events can have on their investment decisions, but it’s essential that we learn to recognize and avoid some common pitfalls.
The Survey Says…
A survey by Cerulli Research and Charles Schwab1 revealed that being easily influenced by recent news and events was one of the top investing missteps people make.2 This bad habit comes from something called recency bias. It’s a common bias where people tend to give more weight to recent events and discount past experiences or data. Of course it’s natural to be influenced by the latest headlines. But when it comes to investing, this can lead to emotional decision-making that goes counter to a level-headed, longer term strategy.
Looking Beyond the Headlines
During periods of market downturn, it’s common to see panicked headlines and news reports about falling stock prices. This can create fear and uncertainty, leading investors to sell their holdings and, unfortunately, lock in losses. However, a long-term investment approach requires us to take a broader perspective and consider market trends over time. By focusing too much on recent events—and failing to resist recency bias—we may miss out on the bigger picture and make decisions that actually work agains long-term financial planning goals.
Overcoming Recency Bias
The good news is that it’s possible to overcome this natural bias. Here are a few strategies for this:
First, stick to your long-term investment strategy. As we’ve said many times before, investing in solid companies with excellent management will tend to make you “more lucky” than trying to time the market. What’s important is resisting the urge to make changes based on short-term market movements or headlines.
Second, focus on the big picture. Instead of getting caught up in daily market fluctuations, focus on long-term trends, patterns, and business fundamentals. This can also help you avoid emotional decision-making.
Third, limit your exposure to news and media. While it is important to stay informed, constant exposure to news and media can fuel recency bias and create unnecessary anxiety—especially during periods of market volatility.
The Takeaway
It’s human nature to want to stay in the know. That’s one reason the news media is such a huge business in the first place! But, being overly influenced by recent news and events is a common investing misstep that can undermine long-term goals for building and maintaining wealth. While nobody is suggesting putting your head in the sand, separating current events and trends from making short-term financial decisions should help you stay focused on the big picture.
Remember, investing is a marathon, not a sprint. While short-term events may create bumps along the way, a well-constructed investment plan and a disciplined approach can go a long way toward helping you achieve your financial goals. Of course, having a professional financial advisor to help you out is a pretty good idea, too!
Sources:
1 https://cdn2.hubspot.net/hubfs/4812204/2019-%234%20InvestmentsWealthResearch.pdf
2 https://www.businesswire.com/news/home/20190923005115/en/Step-Away-From-the-Headlines-Advisors-Say-Being-Easily-Influenced-by-Recent-News-and-Events-Is-1-Investing-Misstep
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