Swedroe: Global Diversification is Key

In an article for ETF.com, BAM Alliance director of research Larry Swedroe points out that, despite the attractive valuations and growth outlooks for emerging market stocks, most U.S. investors dramatically underweight this asset class in their portfolios. According to Swedroe, the underweighting is primarily the result of two mistakes by investors: Country bias: Swedroe writes, “investors tend to believe that not only is their home country a safer place to invest, but it will produce… Read More

When Your Experience Fails You

By Jack Forehand (@practicalquant) —   Because it’s easier, we’re inclined to use our recent experience as the baseline for what will happen in the future. In many situations, this bias works just fine, but when it comes to investing and money it can cause problems. -Carl Richards The next market crash must be coming. We are already in our second correction of the year and having lived through the past two bear markets, it seems obvious that… Read More

The Challenge of Recency Bias for Investors

In a recent video on the Index Fund Advisors website (IFA.com), behavior expert and author Carl Richards discussed the challenge faced by investors from recency bias—that is, the tendency to focus on events from the recent past and project them into the future. “We’re really good at doing it,” says Richards, adding that it can wreak havoc when the past doesn’t repeat itself as we project it might. He says that the only solution is… Read More

Working through the Pain for the Best Long Term Gain

  In a Financial Planning article titled “Investing Should Be Painful,” founder of research firm Wealth Logic, LLC Alan Roth writes, “I suggest telling clients to embrace the pain and take it as a good sign.” This approach reflects insights from psychology and behavioral finance.  The “pain” Roth is referring to comes from going against the cognitive biases of the human brain. Borrowing from Nobel Laureate Daniel Kahneman and others, Roth describes the more automatic… Read More

Overcoming Recency Bias Important to Investing Success

Recency bias, which is the tendency to overweight recent experiences, is a pitfall that many investors face. This article in the latest issue of Financial Planning gives some good examples of the risks of extrapolating recent events, or short term returns in the market, and drawing conclusions from them. For example, when the stock market goes up significantly over short periods of time, like the bull market in the late 90s, recency bias among investors… Read More

Tilson, Heins, and Recency Bias

How did so many investors and analysts fail to recognize the looming economic and stock market crises in recent years? In their latest Forbes column, Whitney Tilson and John Heins say that “recency bias” is a big reason — and a major challenge facing all investors. “One of the more insidious investor biases is a natural tendency to assume that the future will look like the recent past,” write Tilson and Heins in explaining recency… Read More