The title of this article is a quotation of William Shakespeare from his play The Tempest. The phrase means that history sets the context for the present. By knowing what has happened in the past, we can determine appropriate courses of action for the future.

Recency bias sometimes gets in the way of using the past to educate ourselves about what to do in the present and future. Our minds naturally grasp for what happened most recently when we try to predict what is going to happen in the future. Obviously, it is much easier to remember what happened yesterday or last week than what happened a year or two ago. However, it places undue importance on recent events when making decisions. This is problematic, especially if recent events have a low probability of reoccurring.

Recency bias may result in an investor wanting to trim back equity exposure in their portfolio after a 20% drop. Or an investor might desire to buy a stock after it has experienced a large gain. The assumption in both cases is that what has happened in the recent past will persist. Often, the opposite happens. Markets rebound after a selloff or a stock’s price declines as investors take profits.

Our investment process is designed to eliminate recency bias. We put more emphasis on longer historical periods and correlations when building our allocations.

We take advantage of short-term volatility in two ways.

  • When the occasion presents itself to harvest losses we do so, adding an asset for our clients to use to lessen or eliminate taxes on capital gains.
  • We rebalance portfolios opportunistically to add to underperforming asset classes by trimming those that have done well recently.

History can teach us a lot of valuable lessons, and one of them is to avoid recency bias when making investment decisions.