You may remember that the stock market (as measured by the S&P 500) fell by almost 34% in the first part of 2020, but do you remember how much it rose after it bottomed out? (The answer is 65%.) Or you might remember that, at the height of the Global Financial Crisis, the stock market fell by 37% in 2008. But do you remember that it rose by 26% in 2009 and 15% in 2010?*
If you mostly remembered the losses, you are being influenced by what psychologists call “availability bias.”
What is availability bias?
This is the tendency to make decisions based on recalling events or stories that have had an impact on you – and it can lead to bad investment decisions.
It is easy to be drawn into a sense of alarm by the financial news when markets are volatile. And the risks associated with short-term market volatility do make the stock market a bad place to invest money that you plan to use in the near future.
But if you are investing for the long term, say for your retirement, you need to remember that over time, the stock market has gone up more than it has gone down. That fact doesn’t create painful experiences that lodge in your memory, so it’s not as “available” to you. But if you can ride out the short-term cycles, the long-term potential returns from stock market investing can be significantly higher than from investments in cash or bonds. Making decisions that are influenced by availability bias can lead you to miss out on that growth potential.
Availability heuristic examples
Another term for availability bias is availability heuristic. This emphasizes the mental shortcut our brains create to recall our personal examples as context for future predictions.
Talking with a financial planner during periods of market volatility can help you sidestep this behavioral finance investing trap.
If you have questions about your portfolio or are considering taking your money out sooner than expected, you and your planner can discuss and decide what is appropriate for you based on your long-term goals. If you don’t have a planner, contact us for a no-obligation review of your situation. We’ll connect you with a planner who will listen to your goals, help you avoid availability bias and can assist you in creating a financial plan for your future.
* Source: All index data sourced from Bloomberg. All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.