Staying the Course: Recency Bias and International Diversification

Staying the Course: Recency Bias and International Diversification by Jeff Holland{1:40 minutes to read} Recency bias—the tendency to make predictions about the future based on the recent past—is often used in investing. The problem with recency bias is that trends change all the time. Nothing is certain in investing.

Most investors want to be invested only in the “hot performers.” In the the 2000s, international markets were the hot performers. In more recent years, it’s been U.S. markets. Now, some people are questioning whether they should continue holding on to international securities.

International diversification works.

The reality is, nobody can predict trends. It’s very possible that, over the next 5 or 10 years, the whole thing will invert; U.S. stocks may go cold again, making international the “hot performer” once more. A diversified global portfolio is the best antidote to speculation.

As we see over long periods of time, International and U.S. markets have the same returns, it’s just that there paths to get there are different.

In a horse race, one horse pulls ahead for a few strides, then another overtakes him, only to be himself overtaken a few strides later. Investment markets are similar except they have no finish line. In the end, it is wise to “stay the course.”

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Jeff Holland

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