Casey Snyder and Tom Sedoric

Do you know what “recency bias” is? And if so, when was the last time you had a heart to heart conversation with yourself about recency bias? 

Unlike lawyers in a courtroom, these are intended to be leading questions for a very good reason: little is more detrimental to a portfolio’s long-term health than the belief that the status quo is here to stay.

Recency bias isn’t complicated. It is the tendency we have to take recent information and experiences as a baseline for future outcomes or, simply put, what happened today will likely happen tomorrow. Metaphorically speaking, it means putting past experiences (both negative and positive) into an inaccessible storage bin in our psychic attic. Today is great example as we live through a roaring stock market and double-digit equity returns which seem to be the “new normal” and a diversified portfolio is fundamentally solid, if not downright spectacular. Recency bias tells us there’s nothing but fair skies and clear sailing ahead.

But there’s a catch. Wise sailors know that even today’s calm sunny forecast and for the near future can change dramatically and abruptly. The new normal can quickly, and without warning, turn into a force 5 hurricane. As the old saying goes, an economic recession is when your neighbor loses their job and a depression is when you lose yours. 

How does recency bias play influence investor expectations? In some ways it depends upon your age. With 10,000 baby boomers reaching the benchmark retirement age of 65 daily, the Gen X generation is the next in the retirement line. Born between 1965 to 1979, Gen Xers have been tested through three to four major economic downturns. Next in line are millennials (or Gen Y, 1980-1994) and Gen Z (1995-2015) who have had and will have in the future much different economic experiences.

A recent Gen Z college graduate has never experienced or known an economic downturn, while a mature millennial experienced two downturns in the 2000-2010 decade (without wealth) and is now finally gaining financial momentum via the longest economic expansion in American history. 

This is where recency bias comes into play. There are many stories in the financial press about older millennials who hope to reach the finish line of early retirement. According to a recent T. Rowe Price survey, 21 percent of millennials plan to retire between ages 60 to 65 and another 22 percent will retire by no later than age 59. Furthermore, a 2018 TD Ameritrade survey “found that more than half of millennials expect to be millionaires in their lifetimes, with more than four in ten saying it’ll happen” by the age of 50.

As fiduciaries, we encourage our clients to know the whole story. Not coincidentally, there are stories and research showing that millennials may be overreaching a lot. A recent study by the National Institute for Retirement Studies was sobering: a full two-thirds of millennials have no savings and 95 percent are not properly saving for retirement (not unlike Boomers). Other studies have found that some millennials are frugal and good at saving cash but less than onethird own any stock – and therefore not taking advantage of the double-digit equity returns of the past decade. The risk of being too conservative is very real for this demographic. 

Some analysts have called this illusion of soon-to-be wealth the “Zuckerberg effect” which is also nothing new. The late 1920s market boom encouraged many typical Americans to believe they were but a good shoeshine’s stock tip away from sudden wealth. With a decade of boom times behind them, younger Gen Xers and older millennials might believe the good times will roll on and on.

The “good times” can’t roll on forever because, as history shows, these “good times” never do. Statistically it appears that the best equity return days may be behind us. The 2016-2017 S&P 500 burst of 14 percent annual return was proceeded by the 2006-2015 period of a little more than 7 percent. Look at the Baby Boom generation which was the most advantaged with a 25-yearlong long economic boom (and years of double-digit equity returns that followed) yet remain the least prepared for retirement as they overspent and ran up debt. No one plans to fail, but it’s easier to do than many imagine because human nature is fickle – and unchecked recency bias can make it even more so. 

The economist and financial literacy advocate Annamaria Lusardi told CNBC in 2017 that financial discipline is like exercising and eating well: both must be done regularly and with focus. “If I don’t pay attention, I’m likely to spend more,” she said. “Ignorance is not bliss. Inaction is not bliss.”

Our task is to educate our clients to see a sensible path forward to meet realistic goals based on risk tolerance and to meet both their short and long-term needs. As in navigating one’s life, knowing oneself is the key to successful investing. It’s grossly irresponsible to assume, or to advise, that the next decade will be more of the same when it is clear that economically, politically, socially and environmentally the days, weeks and decades will be anything but clear sailing.

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. The views expressed are those of Tom Sedoric – Partner, Executive Managing Director and Wealth Manager and D. Casey Snyder, CFP® - Partner, Senior Vice President and Wealth Manager and are not necessarily those of Raymond James. Steward Partners Global Advisory LLC and The Sedoric Group maintain a separate professional business relationship with, and our registered professionals offer securities through, Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Steward Partners Investment Advisory LLC. 2985754