Broker Check

Don't Become a Victim to Hindsight Bias

| March 25, 2020

Per, "hindsight bias, also known as the knew-it-all-along phenomenon, refers to the common tendency for people to perceive events that have already occurred as having been more predictable than they actually were before the events took place.  As a result, people often believe, after an event has occurred, that they would have predicted, or perhaps even would have known with a high degree of certainty, what the outcome of the event would have been, before the event occurred.  Hindsight bias may cause distortions of our memories of what we know and/or believed before an event occurred, and is a significant source of overconfidence regarding our ability to predict the outcomes of future events."

As I am putting together this post, the S&P 500 is 28.32% off of it's high mostly because of the uncertainty of the COVID-19 virus and how it will impact the economy.  Conventional investing wisdom recommends to focus on long term investing strategies, don't make emotional decisions, and continue to buy into the drop to reduce your cost basis on a routine basis.  These principals are the foundation of investing I've studied more than a decade of my life.  Phrases like "time in the market, not timing the market" and "dollar cost averaging can help reduce risk" are principals that generations before us lived by and have worked well for those disciplined enough to stick to these guidelines.

As many people are aware, logic sometimes doesn't win out when it comes to making personal financial decisions.  The emotion of fear and greed rear their ugly heads when market volatility starts to pick up, and people then proceed with irrational thought processes and actions.

This is the time I start getting asked, "where is the bottom of this market?"  or "I plan on buying in when the S&P 500 falls below 2000 points."  These questions and statements lead to people believing the market is predictable.  Any experienced investor realizes that the market is anything but predictable.

Just like the time of the mortgage meltdown in 2008, people will look back and say "I should have invested everything I had when the market bottomed out."  It's easy to look back in time and tell yourself that's possible, but during those moments, it isn't as clear as you may think it is.  I have people call me to say they want to invest now, but they are going to wait for the market to drop 10 percent more.  How can anyone predict that?  I think to myself, you will be one of those people that miss the boat altogether, and you will become the "I should have done that" person. 

These "I should've done that" people should've bought the market when it was at it's a low in 2009.  They should've bought farm land when it was at $800 an acre.  They should've stocked up on gas when it was $1.60 a gallon.  They should have bought toilet paper in bulk before everyone went to Walmart to buy it by the pallet loads.

The problem with these people is not that they are wrong in their thinking.  They "should have" shifted their thinking from making perfect decisions to just simply not missing the decision altogether.  The person that is just making the decision and acting is usually outperforming the people who are kicking themselves for not being perfect.  You do not need to be perfect to do well in life.  You will need to step up to the plate and swing the bat, however.  If not, you will tell yourself I should have.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 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.