Estate Planning

The Pitfalls of Recency Bias

May 18, 2023 by Hans Blake, CFA, CPA

Reading Time: 3 minutes

In a recent episode of Intelligent Money Minute, we had the pleasure of interviewing Larry Swedroe, the head of Financial and Economic Research at Buckingham Strategic Wealth. Our discussion centered around the dangers of recency bias, a common emotional tendency among investors. Larry emphasized the importance of understanding historical context and avoiding the trap of projecting recent events onto the future. In this blog post, we’ll share some key takeaways from our conversation and explore strategies to overcome recency bias in investment decision-making.

Recognizing Recency Bias

Recency bias refers to the tendency of investors to give excessive weight to recent market events when making investment decisions. We have a natural inclination to believe that what has just occurred will continue in the short term. This bias often leads us to ignore historical data and overlook the importance of long-term correlations. Larry stressed the need to become students of history and cautioned against relying solely on recent trends to guide our investment choices.

Larry highlighted that recency bias is one of the most detrimental mistakes investors can make. While there is evidence of short-term momentum, where recent winners tend to continue performing well for a limited period, it’s crucial to remember that trees don’t grow to the sky. Valuations can reach unsustainable levels, driven by investor enthusiasm. Larry cited examples like the dot-com era and the recent market bubble, where unprofitable companies achieved sky-high valuations based on recent success. However, high valuations eventually come back to haunt investors. To avoid this pitfall, he emphasized the importance of sticking to your investment plan and not being swayed by recency bias.

Strategies to Mitigate Recency Bias

To counteract the influence of recency bias, we discussed several strategies during the interview. One effective approach is disciplined portfolio rebalancing. By selling some of the high-priced winners and buying assets that have performed poorly but offer higher expected returns, investors can maintain a balanced portfolio and avoid chasing recent winners. Additionally, we explored the role of trend following, specifically managed futures, as an investment class that captures short-term momentum swings. However, it’s crucial not to allocate all your assets to trend following, as it can underperform for extended periods. Larry recommended considering a 5% to 10% allocation to mitigate tail risk during prolonged bear markets.

Recency bias can be difficult to overcome alone, especially during times of market volatility. That’s why having a financial accountability partner is vital. This partner can help design a financial plan and keep you grounded when fear and greed tempt you to deviate from your investment strategy. At our firm, we provide clients with proprietary interrogations that guide their decision-making and minimize financial stress. We believe in the power of having someone who holds you accountable and helps you stay on track to achieve your financial goals.

Recency bias is a common pitfall that can hinder investment success. By recognizing the bias and incorporating strategies like disciplined rebalancing and selective trend following, investors can overcome this challenge. Moreover, having a financial accountability partner can provide valuable guidance and prevent emotional decision-making. Remember, it’s essential to view investment decisions through a historical lens and remain committed to your long-term investment plan. By doing so, you can minimize the impact of recency bias and maximize your chances of achieving financial success.

Schedule a short discovery call or meeting

We’ll be interviewing Larry on several podcasts regarding markets, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts.

Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has since authored seven more books.

Larry Swedroe Bio

Since joining Buckingham Strategic Wealth in 1996, Chief Research Officer Larry Swedroe has spent his time and energy educating investors on the benefits of evidence-based investing.

In his role as chief research officer and as a member of the firm’s Investment Policy Committee and Board of Directors, Larry regularly reviews the findings published in dozens of peer-reviewed financial journals, evaluates the outcomes and uses the result to inform the firm’s formal investment strategy recommendations.

Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television shows airing on NBC, CNBC, CNN and Bloomberg Personal Finance. Larry is a prolific writer, contributing regularly to multiple outlets, including Advisor Perspectives and ETF.com.

Before joining Buckingham, Larry was vice chairman of Prudential Home Mortgage and senior vice president at Citicorp.

Larry holds an MBA in finance and investment from NYU and a bachelor’s degree in finance from Baruch College.

Credits: This blog was written in part by ChatGPT, an AI language model developed by OpenAI. The content of this blog reflects the knowledge and opinions of ChatGPT, may or may not reflect the knowledge and opinions of Intelligent Investing, and is protected by copyright laws. Please do not reproduce or distribute without giving proper credit to ChatGPT and OpenAI.

Why Did Traditional Diversification Fail in 2022?

May 11, 2023 by Hans Blake, CFA, CPA

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Reading Time: 3 minutes

Traditional diversification failed in 2022, but why did it happen, and will it happen again? On this episode of Intelligent Money Minute, Hans Blake interviews Larry Swedroe, the head of economic and financial research at Buckingham Wealth Partners, who also co-authored 18 books. According to Swedroe, traditional diversification, which was within the 60/40 stock and bond allocation, failed in 2022. Both stocks and safe treasuries had double-digit losses, which is the first time this has happened, making it almost the worst year for a 60/40 portfolio. Moreover, longer-term treasuries lost over 20%, and the S&P was down by about 18%. Correlation between these two risk assets has been negative for the last 20 years. However, if you look at the last hundred years, the correlation was positive at about 0.2. Therefore, traditional diversification failed because correlations between stocks and safe bonds are time-varying.

Swedroe emphasizes that investors shouldn’t treat correlations as a permanent number, as they are time-varying. He explains that correlations do not mean that when one asset goes up, the other goes down. It means that when one has a better-than-average return, the other one has a worse-than-average return. During the last 20 years, we had a negative correlation between stocks and safe bonds, so investors thought that when stocks got crushed, bonds would tend to do better than their average. However, that didn’t happen in 2022, making investors rely solely on safe bonds and equity bonds, which could be risky.

Swedroe recommends that investors consider including other non-traditional assets that will do well in such periods. For instance, reinsurance, private floating debt, long-short equity, private real estate, and other alternatives can help dampen the risk in an investor’s portfolio. He mentioned that last year, all of the alternatives he owned were up, which helped diversify his portfolio. He advises investors to consider adding other unique sources of risk to their portfolio and not rely solely on safe bonds and equity bonds. Lastly, he says that investors must have a diversified portfolio to help mitigate these unusual time periods when correlations of traditional assets rise.

Schedule a short discovery call or meeting

We’ll be interviewing Larry on several podcasts regarding markets, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts.

Larry Swedroe Bio

Since joining Buckingham Strategic Wealth in 1996, Chief Research Officer Larry Swedroe has spent his time and energy educating investors on the benefits of evidence-based investing.

Before joining Buckingham, Larry was vice chairman of Prudential Home Mortgage and senior vice president at Citicorp.

Larry holds an MBA in finance and investment from NYU and a bachelor’s degree in finance from Baruch College.

The Value of HSAs

June 30, 2021 by Hans Blake, CFA, CPA

Podcast: Play in new window | Download

Reading Time: 2 minutes

On today’s Intelligent Money Minute, we’ll interview Larry Swedroe on the value of HSAs. HSAs are becoming more popular as people grow to understand them. Multiple benefits come when utilizing an HSA. First, there’s an upfront tax deduction. The second benefit is using the HSA as a way to fund medical expenses. Larry suggests to those who have sufficient taxable dollars to pay their medical bills without an HSA. They should treat the HSA as an investment account. The benefit is that it’s never taxed.

As Larry and I mentioned, there are a lot of benefits to using an HSA if you qualify. We’ve written a comprehensive blog on this topic on our website. At Intelligent Investing we strive to minimize fees and we think of taxes as another fee that we try and minimize for our clients. We’d love to have a complimentary coffee or virtual meeting with you to discuss ways in which we may be able to serve you and your family. To simply get started, click here.

Schedule a short discovery call or meeting

We’ll be interviewing Larry on several podcasts regarding markets, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts.

Larry Swedroe Bio

Since joining the Buckingham Strategic Wealth in 1996, Chief Research Officer Larry Swedroe has spent his time and energy educating investors on the benefits of evidence-based investing.

Before joining Buckingham, Larry was vice chairman of Prudential Home Mortgage and senior vice president at Citicorp.

Larry holds an MBA in finance and investment from NYU and a bachelor’s degree in finance from Baruch College.

Why You Shouldn’t Check Your Portfolio Daily

June 10, 2021 by Hans Blake, CFA, CPA

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Reading Time: 2 minutes

During this episode, Larry gives multiple reasons why you shouldn’t check your portfolio daily. There’s a good bit of science surrounding this topic, yet many still misbehave. The research shows that investors are highly risk-averse. Investors feel the pain of a loss twice as much as the feeling you get when a portfolio gains. The larger the dollar amount, the higher that ratio is. On a daily basis, Larry says the stock market goes up or down about 50% in either direction. As you extend the maturity or the length of time, the odds start to favor the market going up. The more days you watch the market the more likely there will be a negative emotional toll. Your much more likely to stay in the joy territory if you don’t check frequently.

Larry offers some good advice and reasons why you may not want to check your portfolio frequently. At Intelligent Investing, we firmly believe in the value of understanding behavioral finance, which is the school of thought that describes how investors actually act. We try to understand how men and women think to minimize the irrational decisions we make from our own emotions and inherent biases.

Schedule a short discovery call or meeting

We’ll be interviewing Larry on several podcasts regarding markets, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts.

Larry Swedroe Bio

Since joining the Buckingham Strategic Wealth in 1996, Chief Research Officer Larry Swedroe has spent his time and energy educating investors on the benefits of evidence-based investing.

Before joining Buckingham, Larry was vice chairman of Prudential Home Mortgage and senior vice president at Citicorp.

Larry holds an MBA in finance and investment from NYU and a bachelor’s degree in finance from Baruch College.

Two Key Elements of Retirement Success and Happiness

May 27, 2021 by Hans Blake, CFA, CPA

Podcast: Play in new window | Download

Reading Time: 2 minutes

On this episode of Intelligent Money Minute, we interview Larry Swedroe on the two key elements of retirement success. There’s more than just numbers when creating a financial plan. During this episode, Larry breaks down key elements that are important to consider in a retirement plan. He stressed the importance of having a life in retirement. Many gain their sense of worth and satisfaction from their everyday work. Retirement can is a drastic shift. There are a lot of unexpected emotions and challenges that come with this change. According to Larry, you need two key elements for retirement success. First, you need depth and breadth in social relationships. Second, you need a sense of worth and accomplishment.

At Intelligent Investing, we want to minimize your financial stress to maximize your life. We believe that every person is called to a specific mission in life, and we have a limited amount of time to accomplish this mission. Our goal is to minimize financial stress to maximize your life. In doing so, you’ll be better positioned to accomplish your goals.

We’d love to take the first step in a professional relationship with you by having a virtual meeting or a complimentary coffee. Visit investedwithyou.com and click on the “Get Started” button to learn more.

Schedule a short discovery call or meeting

We’ll be interviewing Larry on several podcasts regarding markets, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts.

Larry Swedroe Bio

Since joining the Buckingham Strategic Wealth in 1996, Chief Research Officer Larry Swedroe has spent his time and energy educating investors on the benefits of evidence-based investing.

Before joining Buckingham, Larry was vice chairman of Prudential Home Mortgage and senior vice president at Citicorp.

Larry holds an MBA in finance and investment from NYU and a bachelor’s degree in finance from Baruch College.

The Value of a Written Financial Plan

May 6, 2021 by Hans Blake, CFA, CPA

Podcast: Play in new window | Download

Reading Time: 2 minutes

On today’s Intelligent Money Minute, we interview Larry Swedroe on the value of having a written financial plan. A written financial plan helps one avoid glaring holes that may not be apparent before writing it down. Also, studies show that those with a written financial plan tend to stick it far more than those who don’t. During this episode, Larry gives multiple examples of how some avoided financial disaster with a written financial plan and some who experienced financial disaster due to not having one.

Many people plan more for their summer vacations and weddings than then do their retirement. Studies have shown that people are more committed to a written financial plan. At Intelligent Investing, we guide our retirees into and through retirement, and one of the ways we do that is through creating a comprehensive written financial plan. We review your retirement concerns and risks, and we dive deep into your spending needs, wants, and wishes. Typically, we review the financial plan annually with you and update it as needed for life events as life changes. If you are interested in having an independent professional guide you in creating a comprehensive written plan, please go to “Get Started.”

Schedule a short discovery call or meeting

We’ll be interviewing Larry on several podcasts regarding markets, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts.

Larry Swedroe Bio

Since joining the Buckingham Strategic Wealth in 1996, Chief Research Officer Larry Swedroe has spent his time and energy educating investors on the benefits of evidence-based investing.

Before joining Buckingham, Larry was vice chairman of Prudential Home Mortgage and senior vice president at Citicorp.

Larry holds an MBA in finance and investment from NYU and a bachelor’s degree in finance from Baruch College.

The Hardest Decision a Child Will Have to Make (Part 2)

April 21, 2021 by Hans Blake, CFA, CPA

In our previous post, we talked about how many seniors unrealistically believe they can take care of themselves for the rest of their lives. Unfortunately, this isn’t the case, and we discussed the importance of regular communication and how to deal with stubborn parents. This post is a continuation of that theme…

Make Sure All Siblings Are Unified

It is vital that all siblings and family members are on the same page. It often only takes one disgruntled child who urges the parent to stay in his home to make placement nearly impossible. Sometimes this challenging sibling isn’t even the one taking care of the parent or may live far away without first-hand knowledge of the situation.

Avoid Extraneous “Baggage”

When families get together, there can sometimes be personal “baggage” brought to the table. It is best to avoid unnecessary confrontation or sensitive family subjects, for the good of the parent. Remember, don’t be selfish. It is not about your issue or past grievance, it is about what’s best for your parent.

Power of Attorney

Important items to address include financial issues to pay for the parent’s living expenses, and who will act as the elder’s durable power of attorney for health care. One capable person should be appointed as the elder’s primary advocate. This person, whether a son (or daughter-in-law) or daughter or adult grandchild, should oversee financial decisions and act as the elder’s durable power of attorney for health care.

Dealing with the Guilt

No matter how smoothly the process goes, children often retain guilt about moving elderly parents to a long-term care facility, especially, if they are religious. Regardless of whether you promised to never put a parent in a nursing home, the decision about placement must be based on what’s best for the parent at a given time.

Remember, putting a parent in a nursing home may be the most loving act that a child can do because it may improve the quality of the parent’s life from medical and social perspectives. Nursing homes vary in quality but in general, are places where parents often thrive.

Remember, putting a parent in a nursing home may be the most loving act that a child can do because it may improve the quality of the parent's life from medical and social perspectives. Click To Tweet

Forming a Caregiving Team

Caregiving is a family affair. It is important to gather your siblings, children, uncles and aunts together to address an ailing loved one’s needs. Have a meeting and discuss the problem, without the parent present. Remember to never go it alone.

You may also want to include a financial advisor, home care provider, and elder care attorney on your caregiving team. A financial advisor may be able to help answer financial questions related to placing mom or dad in an assisted living or skilled care home. A wealth manager may help preserve capital for your aging parent and help with determining the best way to fund the assisted living home. The home care provider may be able to “shop around” for the ideal next home for your parent. An elder care attorney can help with legal questions related to your aging parents.

We’d like to be part of your Caregiving Team

Intelligent Investing’s first core value is Compassion. We think that it is important to give generously to those in need, and your parent is now the one in need. We may be able to help you organize your parents’ “financial junk drawers.” We can also manage their remaining assets in a way that helps preserve them to pay for their next place of living. We can be your “financial quarterback” in organizing the key professional players you need input from. We often collaborate with several professionals who deal with issues that may be outside of your wheelhouse. As you face this emotional time in your life, we would be honored to serve with you and help you tackle the toughest decision you may ever face.

Your Retirement Journey- How It Compares To Climbing Mount Everest (Part 4 of 4)

May 27, 2020 by Hans Blake, CFA, CPA

Choice

Reading Time: 4 minutes

How to Choose Your Sherpa- A Retirement Guide Can Be Helpful

As a reminder from our previous blog, climbing Mount Everest successfully has been a goal of many people. Few have attempted it, and fewer still have done so successfully. Mt. Everest was first conquered by Sir Edmund Hillary and Nepalese Sherpa mountaineer Tenzig Norgay in 1953. Even though Nepal issued a record 381 permits in 2019, last year’s climbing season had a limited number of good weather days, leading many people to set out at once when the skies cleared and the winds seemed calm. Unfortunately, this caused crowding, and at least 11 people died last May, even though most were experienced trekkers.

After last year’s record deaths on Everest, people seem more aware of the importance of Norgay these days and that is entirely appropriate. Sherpa people are one of the ethnic groups native to the most mountainous regions of Nepal and the Himalayas. Many Sherpa are highly regarded as elite mountaineers and experts in their local area. They were immeasurably valuable to early explorers of the Himalayan region, serving as guides at the extreme altitudes of the peaks and passes in the region, particularly for expeditions to climb Mount Everest. Sherpas are renowned in the international climbing and mountaineering community for their hardiness, expertise, and experience at very high altitudes. It has been proven that part of the Sherpas’ climbing ability is the result of a genetic adaptation to living in high altitudes.

We believe the best Sherpas in the financial world are 100% fee-only fiduciary firms. Unlike brokers who make money based on commissions, fee-only fiduciary firms must act in clients’ best interest at all times and are paid only by their clients. Fee-only means they don’t sell products and are paid based on the assets that they manage. We believe this removes potential conflicts of interest and places them on the same side of the table as their clients. The Sherpas’ job is the explorer’s safety and well-being on the trek, not to sell you trekking gear.

For decades, Sherpas have guided explorers to the top of Mount Everest successfully, and they are responsible for safety, equipment, packing, and the camp. They not only have expertise but also circulatory systems which allow them to physically endure high altitude much easier than normal humans. Having a guide who can provide advice and recommendations can be the difference between life and death. Since climbers burn up to 15,000 calories and lose as much as 20% of their body weight, if a climber suffers unexpected equipment failure, then it is even more important to be extremely prepared. A combination of inexperienced climber and inexperienced guides is a formula for disaster. Bodies are seldom recovered….

There are those who would rather not have a guide as they climb Mount Everest. As of the date of this blog, four people have attempted to summit Mount Everest solo. Two were successful. Two died on Everest. With 50/50 odds, we think it best to have an experienced guide on the journey. We also think that do-it-yourself retirement is similarly foolish. Having an expert that prevents you from slipping and making a costly mistake that affects your entire retirement is worth having.

Just as successfully climbing Everest takes a lot of preparation, the same is true for retirement. Choosing the right guide and the right firm is key. The cheapest guide could end up as the most costly. Our ascent was building our careers, accumulating wealth, and perhaps raising a family. A slip can destroy all of this. Our descent is equally important and potentially equally treacherous. We need to safely finish this round trip adventure so we can start another ascent of our own choosing…

So we need a good plan, to choose the right route and the right guide. Preparedness is key, but the right sherpa is one who has helped others make that round trip successfully, so we have both a successful ascent AND descent.

For many years now, the DALBAR survey has proven that good advisors can add great value for investors. As your guide, or sherpa, we add value in a lot of different ways:

Portfolio Excellence. We locally manage all our portfolios with portfolio management expertise by an in-house Chartered Financial Analyst.
Planning Excellence. We custom design your financial plan along side you. We listen to your personal goals, risk tolerances, and time horizon(s).
Maximizing Time. We use real-time integration of your financial plan, your portfolio, and your risk tolerances.
Minimizing Fees. As an independent advisor, we strive to minimize all fees, including taxes.
Tax and Estate Planning. We have CPA backgrounds and CFP® experience that help us coordinate with your attorney or CPA.
Behavioral Coaching. We guide you through major life decisions and the inevitable emotional periods of bull and bear markets.

At this point in our lives, we can choose the peaks we want to climb. Let’s be sure and make a safe round trip so we can decide what to do in retirement, and not be required to do things we don’t want to do. Here are some of the topics we help our clients solve:

Social Security, retirement plans, pension options and choices;
Income planning and nest-egg distribution (how to not run out of money, income replacement, and budgeting);
Life and long-term care insurance;
Health and wellness;
Tax management and required minimum distributions (RMDs);
Managing debt (if you have it);
Lifestyle decisions;
Aging parents and other dependents;
Estate planning (How much is enough? How much should we leave our heirs? How do we decide who should get what?);
Housing decisions (Should we downsize?).

Intelligent Investing is an independent, fee-only registered investment adviser (RIA) with a fiduciary responsibility to act in your best interest at all times. We are paid only one way–by our clients. Fee-only means we don’t sell any products and are paid based on the assets that we steward. This removes potential conflicts of interest in our advice and places us on the same side of the table as you. We put ourselves in your shoes for every decision we make.

We hope you have enjoyed our mini-blog series on the parallels between climbing Mount Everest and transitioning into Retirement.

To read our other blogs, click below: (NEED TO ADD HYPERLINKS)

The Slippery Slope of COVID-19 (Navigating the Bear Market)- Part 1 of 4
The Slippery Slope of COVID-19 (Beware: Avalanches Lie Ahead)- Part 2 of 4
The Slippery Slope of COVID-19 (The Incredible Cost to Climb Mount Everest)- Part 3 of 4

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