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Understanding the Recency Effect
By Lon Jefferies MBA CFP® www.NetWorthAdvice.com
The year 2013 was viewed as a very positive one by most investors; especially physician-investors.
The S&P 500 index (measuring large cap U.S. stocks) was up 32.39% for the year.
However, the reality is most other asset categories didn’t come close to keeping up with the pace set by U.S. equities.
For instance:
- Foreign Stocks (IEFA): 22.46%
- Emerging Markets (IEMG): -2.77%
- Real Estate (IYR): 1.16%
- US Government Bonds (IEF): -6.09%
- US TIPS (TIP): -8.49%
- Corporate Bonds (LQD): -2.00%
- International Bonds (IGOV): -1.37%
- Emerging Market Bonds (LEMB): -6.73%
- Commodities (DJP): -11.12%
- Gold (GLD): -28.33%
In Hindsight
In retrospect, the way to maximize your gain last year would have been to hold a completely undiversified portfolio consisting of nothing but U.S. stocks. The danger going forward is to learn the wrong lesson from 2013. Investors always have the temptation to fall prey to the Recency Effect, continuing and exaggerating the behaviors that worked in the recent past believing the environment we’ve just been through will be permanent.
The Long-Term Benefits of Diversification
Many will abandon their investment strategy because it didn’t give them the absolute best result last year, failing to recognize the long-term benefit of diversification. I’d argue that a better perspective is to remind yourself that the definition of diversification is that you always dislike a portion of your portfolio.
Always Laggards
Even in the most widely prosperous market environment, a truly diversified portfolio will have an element or two that lags the market. In fact, if at any time a portion of your portfolio isn’t generating negative returns, you should be concerned about a lack of diversification in your investment strategy.
Allocate Assets Now
Now is an ideal time to review your asset allocation and remind yourself why we diversify. Modifying your allocation with a focus on what happened in 2013 would be similar to guessing a coin flip will land on tails because it did on the previous flip.
Assessment
The correct lesson to take from 2013 is that over time, a well-diversified portfolio is capable of producing sufficient returns to help you reach your investment goals while minimizing risk.
Conclusion
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Filed under: Investing, Portfolio Management | Tagged: asset allocation, DJIA, Lon Jefferies, Recency Effect, S&P 500 Index, U.S. equities., www.NetWorthAdvice.com |
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Financial Media Given Up On Long-Term Investing?
An investment bank’s three-month view on stocks. Week-over-week reporting on money flows into/out of stocks. Financial media programming with options trade ideas.
Does anyone care about six months from now? A year from now? Five, ten years from now?
I think history clearly shows that individual investors are way over their head in the short-term trading game.
Yes, the post-Financial Crisis world is less stable (and therefore the “long-term” may seem much more questionable). But, if you think long-term investing can’t work (and work very well), I think you ought to consider the likes of great long-term investors such as Warren Buffett and Peter Lynch…or the multitudes of successful high-tech investors in Silicon Valley.
Long-term investing has sure been good to many of them.
Yet, the focus of the financial media seems increasingly short-term-minded.
And while I realize that they are likely just meeting market demand for such content, it seems to me that for most investors, a short-term focus is bad for long-term results.
http://unlovedmoney.com/2014/09/25/financial-media-given-up-on-long-term-investing/
David Twyford
via Ann Miller RN MHA
NOTE: David Twyford is a private investor. He is a former commodity exchange member/broker who has been quoted by Forbes and written for Futures magazine.
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