Did “Recency
Bias” kill your portfolio in 2022? In
investing, many people load up on sectors that have recently done well believing
they will continue to do well. These
investors fail to follow the common advice to regularly rebalance your
portfolio. Growth stocks have soared to
high levels in recent years making big growth companies the daily topic of
conversation on the financial channels.
Many investors weighed their portfolios heavily towards growth stocks
hoping that infinitely higher stock prices are possible even as corporate
earnings can only grow by so much. This
past year taught a harsh lesson to those who ignore valuations and keep chasing
the highest flyers. In 2022, an index of
growth stocks fell by 33% while an index of value stocks only fell by 2%. Those who fell into the “recency bias” trap may
have lost a lot more than if they regularly rebalanced their portfolio. Many people have avoided international stocks
for the same reason but equities from other parts of the world lost 2% less
than U.S. stocks this year (and 17% less than U.S. growth stocks.) It is easy to fall into this trap when
analysts on TV tell you to keep buying the most expensive stocks. When the big growth name goes from $100 to $120,
they now tell you they have moved their target to $140. When it hits $140, now they tell you it will
go to $160. There is rarely sound logic based
on fundamental factors for why the price target is raised just because the
stock price is higher when the company didn’t change much. Maybe you loved Tesla stock and didn’t
diversify as it rose. Tesla fell 65% in
2022. Maybe you loved Amazon after everyone
stopped going to stores in the Covid era.
Amazon fell 50% in 2022. No one
knows which stock sector will outperform in the coming year. Rebalancing your portfolio at least annually
will allow you to lock in some gains from the sector that did best in the past
year and ensure that you have some exposure to the sector that will do best in
the coming year.
(Past performance may not be an indicator
of what to expect in the future and your individual circumstances should be
considered in any investment decision.)
Larry Pike, CFA
Client
Priority Financial Advisors LLC
www.clientpriority.com
Hourly, Fee-Only Financial Planning and Advice.
No Commissions. No automatic, annual fees.
