Hindsight bias, remembering facts as if we knew them in advance. It’s what causes us to make big investment mistakes. People like to believe that they saw the last six months’ fantastic rally coming, and yet interestingly, their behavior suggests that they didn’t. Consequently, they believe that their insights looking forward are valid when in reality they’re not. I call this a self-induced bear trap. As social animals, we squirm when not following our herd. The herd right now is chasing a late-stage bull rally. Some are even questioning having anything but a hundred percent equities in their portfolio. This is not a call to action. If you have an appropriate asset allocation then you’re currently enjoying nice returns, while positioned to weather the inevitable storm. Hold the line. Resist your reptile brain’s instinct to follow the herd over a financial cliff like a lemming.
Try this experiment. Close your eyes. Think back to how you felt as the market collapsed back in 2008. Now, 11 years closer to your retirement, ask how much worse you’ll feel knowing you have a decade less to recover from a severe market correction. Be aware of hindsight bias. Reject the herd. That’s a recipe for long-term investment success. Remember this market, like all other markets, this too will pass. Now, if you’d like more information on hindsight bias or any of the other heuristics we talked about in my latest book, just click on the links on the website. We’ll be happy to get you a complimentary copy. Meanwhile, we wish you the best of investing success.
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