What were your fondest childhood memories? What is the farthest experience or fact you can remember? For me I have a few, that are clear as day. Like the first time I ate a Bojangles Cajun Filet Biscuit, I was probably around 7 years old. It was Spring, my grandmother had just taken me to our last playoff game for our little league baseball team and we stopped at the Bojangles in Selma on the way back to her house. It was cloudy and overcast, and air temps in the low 70’s. It was 5:50PM when we pulled up to the order window. I remember seeing the time on the dash of her Buick. I remember how spicy it was! It was chicken, but so spicy! What in the World did she order me? Today, my love for all things spicy and Bojangles continues, thanks to that first experience.
Studies have shown that Infantile Amnesia (1st), or childhood amnesia, is a real event; that individuals cannot retrieve episodic memories before the age of two or four, and generally lose these by the time they hit double digit ages. Many recalled memories have very strong emotional ties associated with events, be it traumatizing or extremely rewarding. And ironically, other studies have shown that many of these events – even if not recalled in fond memory, can often direct our decisions and opinions of various topics.
Another interesting study is Serial Position Effect, or what we investment folks call Recency Bias. Hermann Ebbinghas performed multiple studies (2nd ) on himself and participants that demonstrated while recall accuracy varies, people tend to recall the end of a list or most recent picture, sound or event. These memories usually last in our activated memory longer, than the previous events that are stored in our dormant memory, which tends to hold on to memories from longer ago. All the ‘stuff’ in the middle is usually lost.
So, on the fact of investing – recency bias (3rd) usually contributes to very poor expectations, that are not met, and/or very poor decisions. Do you remember how the S&P500 performed in 2017? Probably not, but you may be aware of the recent selloff, or even the -15% drop we experienced in the 4th quarter of 2018. The year of 2017 was very odd. In fact, as the chart suggest below (4th) – something we haven’t experienced in decades.
The result of this was fear and surprise when we experienced more volatility in 2018, in common language meaning the market is up, down, up, down consistently. And we didn’t like it. The same goes when things go really well. Altavista, Ask Jeeves, AOL, Enron. Those names ring a bell? In the late 1990’s technology stocks, more accurately dot.com stocks were going to make us all rich! They’re up 80% in the last year, it’s going to continue. News media called it the next wealth maker like railroads and oil. Well, the following years in 2001-2003 showed that does not happen. Many people were surprised when companies failed, and the markets went the opposite direction. (5th)
Investing is a very emotional interaction. More so than many people want to acknowledge. Going back to childhood memories, many of my retired clients relate investing, and stock market, to absolute loss and the R word, Risky. Why? Well a lot of it comes back from their experiences with their parents, and their pain, during and after the Great Depression. Even today, for clients my age, we came into the adulthood and started our careers right around the Great Recession and major fall of financial markets from 2007-2009. Many of us today still feel that pain, and like touching a hot stove, realize they don’t want that to happen again. And over the last decade we have seen an amazingly strong stock market, the S&P500 is up over 300% since it’s low in March, 2009 (6th). A word to the wise – don’t let recency bias let you think that will continue. No one has a crystal ball, but one thing is for certain, markets do change. The one thing that never changes, however, is that the economies of the World will in fact keep growing. The Dow Jones, as I write this, is valued at 26,248, and if it goes to 22,000 or 28,000 in the next year is anyone’s guess. If anyone had a crystal ball, investing would be easy, and you wouldn’t need professional guidance. Don’t let your earliest, or most recent memories, stop you from experiencing the good things in life. Down markets never last forever, but tough people do. My job is to always alleviate the concern for clients, and let them live life, storing up rich memories that one day will be recalled again.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.
SOURCES
1st - https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5473198/
2nd - https://conversionxl.com/blog/serial-position-effect/
5th - https://www.moneycrashers.com/dot-com-bubble-burst/