Most people think investing is about the numbers, get the math right, but your money is really about the 7 inches in between your ears. Investing is psychological exercise filled with land mines based upon your personal biases.
The 2008 crisis caused the longest recency bias in history, the economic and emotional scars ran so deep, that investors are still carry their “crash binoculars” around their necks. The problem is those binoculars around their necks are choking off their long term returns.
Recency Bias tells us we’re inclined to use our recent experience as a baseline for what will happen in the future, the truth is that crashes are rare events, but corrections and volatility are frequent occurrences.
The S&P is now 221% off lows, but the green arrow on below chart shows the 16th correction of 5% or more in this secular bull market. During all 16 pullbacks, the internet was full of stories that the next 2008 was at hand—Greece, Brexit, China debt, Oil crash, etc.
Sensationalism is good for the media, but bad for your portfolio, discipline is good for your life and great for your finances, so make a plan and be disciplined. As the Godfather of value investing, Ben Graham said that “the investor’s chief problem-and even his worst enemy-is likely to be himself.”
Chart courtesy of Doug Short Blog.