“In the business world, the rear view mirror is always clearer than the windshield.” – Warren Buffett
We are all subject to behavioral biases, the most serious perhaps being a tendency to extrapolate recent developments into the future regarding investment returns. If the recent past has been poor many investors tend to assume this will continue going forward and as a result will want to sell out or vice versa. However such a mentality only serves to wrong foot investors in the market cycle.
We find that investors who attempt to time the market often buy when the market is high and sell when the market is low thus consolidating losses.
Just as spending too much time focussed on the rear view mirror can cause accidents on the road, placing too much focus on past events can lead to poor investment decisions.
“Stop trying to predict…” – Warren Buffett
If you are going to actively move your investments around, the key is to have a process that helps identify extremes – when assets are undervalued, underloved and oversold and vice versa. Or if you don’t have the time or inclination to put the effort in, it’s best to take a long term approach and let others manage cyclical market fluctuations.
An important thing to remember is “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” – John Templeton