Don’t Be The Turkey...

On this the Sunday after Thanksgiving, ask yourself this question: have you ever considered the holiday to be a “Black Swan” event?
I assume most of you answered that question with a “No.”
If you have a turkey sandwich in front of you at this very moment, I apologize, but think about Thanksgiving from the perspective of that turkey you’ve enjoyed so much and ask yourself again if you’d consider the holiday to be a black swan event.
From the turkey’s perspective, Thanksgiving is the black swan event.
From birth, the turkey is fed and protected and fully expects that its lifestyle will continue indefinitely. But then Thanksgiving happens and the turkey ends up roasted and displayed on a platter, never having realized what was coming for it.
If you’re feeling empathy for the turkey right now, again, I apologize, but this exercise isn’t really about the turkey. It’s about recency bias.
We rely on habits every day. We eat the same foods, go to the same places, have the same schedules and behaviors day in and day out.
Habits, of course, make things easier for us, but our habit of having habits does something else to us called recency bias.
Humans are inclined to use our recent experiences as a baseline for what will happen in the future. This bias works just fine in our day-to-day, but when it comes to investing, it can trick us into making decisions we might not otherwise make.
Sven Carlin, the weekday contributor to our newsletter, recently wrote about recency bias in an article that asked readers to question if their brains were wired for investing. I encourage you to read his article. 
Sven cautions against relying on your recency bias in your investing and encourages readers to instead think in probabilities.
When the market is up—hello seven year bull market—we become convinced that it’ll never end and risk too much blindly assuming that the black swan event will never come.
Like our turkey from the beginning of this article, who bets everything on life continuing to be good without realizing Thanksgiving is approaching, investors bet everything on a market they think will climb forever without ever realizing the probability of the next big crash is increasing and that crash is around the corner.
Likewise when the market is down, we become certain that it will never climb back up. We cash out our portfolios and hide the cash in our mattress because recency bias tells us the market isn’t going back up.
Then we’re left sitting on a mattress filled with money that isn’t earning anything, missing the opportunity right in front of us.
Now this isn’t about predicting the timing of the next crash. It’s about thinking about the probability of the next crash and preparing accordingly.
Instead of considering as many factors as possible, and realizing that the market goes up and down, we get stuck in our recency bias rut and keep acting as though the situation we’re in now will never end.
But if we take the long view, recognizing that this bias exists, and prepare ourselves for the next crash or climb, we’ll be ready to take advantage of whatever market situation we find ourselves in.
Don’t be the turkey and stop letting habits and yesterday’s experience be what determines what you do with your money tomorrow.