Investors don’t often react as rationally as they might think to the ups and downs of the market.
In fact, in times of extreme volatility or poor performance, emotions threaten to hijack our common sense and potentially twist our memory.
This is called recency bias and it’s where investors evaluate their portfolio’s performance based on their perspective of the most recent results.
It’s basically the tendency to think that trends and patterns we observe in the most recent past will continue in the future.
Unhelpfully it causes us to over-emphasise our most recent memories and experiences when making investment decisions.
We expect that an event is more likely to happen next because it just occurred or it’s less likely to happen because it hasn’t happened for some time.
And unfortunately investors have notoriously short-term memories.
Such an impediment can create a gain-sapping apathy that leads buyers to engage at the top and sellers to exit at the bottom.
Recency bias is further compounded by “confirmation bias,” which is best described as an investor’s selective memory.
Confirmation bias leads us to pick and choose the memories best served to fuel our established narrative.
It’s also one of the reasons why so many people are terrible at managing their own money.
This is because they let confirmation bias take control of their mind by only seeking information from sources that agree with their pre-existing beliefs.
But I have some bad news.
Regardless of how you remember the market, you can be sure that the market has no memory of you.
It doesn’t know when you bought that share or managed fund or how you developed that property investment strategy – and it definitely doesn’t care when you’d like to sell your asset.
The market is going to do what it’s going to do regardless of your desires, wants or needs.
So, the best strategy going forward is simply the best strategy going forward –irrespective of what just happened and how well or how poorly your investments have performed.
Whether you’re a forward or a back in your life’s football team, you’ll be best served to forget what just happened in the last game and make the best decision now – in the present.
But the big question remains:
How do we know what is the best decision?
Well, we think smart by employing our long-term memory or better still use that of an expert – one who isn’t prone to the subjective biases you are– such as one of the independent property strategists at Metropole.
While short-term recall can be our enemy, long-term memory – when informed by appropriate education and experience – can be our ally.
Fortunately, in investing, we have the collective long-term memory of a multitude of brilliant people to draw on.
The challenge, in this age of information, is to sift through the masses of financial content riddled with the recency, confirmation and other biases of others to find peer-reviewed and actionable content based on long-term memories.
Of course it’s when markets are on an extended good (or bad) streak that our mental fortitude is put to the test.
And headlines that are biased can underpin the short-term memories we’re trying so hard to forget.
Long-term wisdom can fade in its appeal as it’s increasingly questioned.
Rationality, discipline, balance and diversification are out, while concentration, experimentation, impatience and prognostication are in, but they don’t win.
Yes, of course, talent, hard work, discipline and experience are all important, but they are minimum requirements for success.
Those who excel in sports, investing and life must also have poor short-term memories and continue to always look to long-term wisdom for guidance instead.
Here’s a way to facilitate that:
If you want to become financially free through property, my advice is to stick to your original strategy- you do have one, don’t you?
This will mean that you won’t get distracted by all the market noise.
Think big picture and long term and remember that Australia’s population growth and our relatively strong economy will ensure that well located “investment grade” properties will keep increasing in value over the long term.
If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.
Please click here to organise a time for a chat. Or call us on 1300 20 30 30.
When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.
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