Financial advisors are every bit as susceptible to the Recency Effect as everyone else. Extrapolating a future based on the immediate past has been elevated to something of an art form among those whose job it is to plan for (if not bet on) the future on behalf of their clients.
Jason Zweig has a must-read piece up today on the Recency Effect for his Intelligent Investor column over at the WSJ:
Decision Research, a nonprofit think tank in Eugene, Ore., has conducted a nationwide online survey of investors seven times since 2008. These surveys have shown that investors’ forecasts of future returns go up after the market has risen and down after it has fallen.
William Burns, an analyst at Decision Research, says investors’ forecasts of the market’s return over the coming year were heavily swayed by how stocks performed in the previous month.
So take the below with a grain of salt, but understand its importance as you see dips like Friday’s continue to be bought. The guys with the buying power are now in the bull camp.
After a strong January for the markets, financial advisors have turned sharply more bullish for 2012, according to two surveys conducted by SEI Advisor Network in mid-January and again in early-February…
The survey was completed by more than 100 advisors, the majority of whom manage more than $50 million in assets. Some key statistics from the February survey are:
- 90% of advisors predicted positive return for S&P 500 in 2012 (a 18% increase from results in mid-January)
- 50% increase of advisors predicting gains of greater than 5% in S&P 500 from January to February
- More than 33% predict that the “Pessimism Bubble” will burst in 2012
- Nearly 33% said “the tide is turning” for the economy
- Most accurate phrases to describe today’s investing world: “Bull markets climb walls of worry,” and “A rising tide lifts all boats”
- 87% say likelihood of payroll tax cuts being extended beyond February have a 50/50 chance, or better
According to the research cited in Jason’s piece, 40% of people use the recent past as their predictor while another 40% or so say that what’s happened in the recent past is about to revert back the other way. Everyone else just says the future is random or unknowable. I wonder what that research would look like were it conducted on just FAs who handle other peoples money…