Check your recency bias

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

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. Little is more detrimental to a portfolio’s long-term health than the belief that the status quo is here to stay. 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 can change dramatically and abruptly. The new normal can quickly, and without warning, turn into a Category 5 hurricane.

How does recency bias influence investor expectations? In some ways it depends on your age. With 10,000 baby boomers reaching the benchmark retirement age of 65 daily, Gen X is the next generation in the retirement line. Born between 1965 and 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 already had and, in the future, will have 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.

According to a recent T. Rowe Price survey, 21% of millennials plan to retire between ages 60 and 65 and another 22% 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 10 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% 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 a third 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.”

With a decade of boom times behind them, younger Gen Xers and older millennials might believe the good times will roll on and on. But, as history shows, these “good times” never do. Statistically, it appears that the best equity return days may be behind us. The 2016-17 S&P 500 burst of 14% annual return was preceded by the 2006-15 period of a little more than 7%.

Look at the baby boom generation, which was the most advantaged with a 25-year economic boom (and years of double-digit equity returns that followed) yet remains 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.

D. Casey Snyder is partner, senior vice president and wealth manager, and Tom Sedoric is partner, executive managing director and wealth manager at The Sedoric Group of Steward Partners in Portsmouth. They can be reached at 603-427-8870 and thesedoricgroup.com.