Avoid The Recency Pitfall
Larry Swedroe does a great job of talking about the importance of re-balancing. Steve
Last year, U.S. real estate investment trusts (REITs) were the best-performing equity asset class. In addition, U.S. stocks far outperformed international stocks. Unfortunately, historical evidence demonstrates that individual investors tend to be performance chasers. They watch the markets, then buy yesterday’s winners (after the great performance) and sell yesterday’s losers (after the loss has already been incurred).
Thus, I wasn’t surprised at the amount of time I spent in 2014, and in early 2015, trying to convince investors to avoid the mistake I refer to as “recency.” Recency is the tendency to extrapolate recent returns far into the future, which causes investors to buy high and sell low. That’s not exactly a recipe for investment success.
The Importance Of Rebalancing
The message I delivered to investors was to stay the course, and even to rebalance as required for them to adhere to their investment policy statement. Rebalancing calls for the sale of some of a portfolio’s recent winners. The proceeds are then used to buy more of the recent underperformers.