Conclusion: The ABCs of Behavioral Biases
During this series, we have learned that our own behavioral biases are often the greatest threat to our financial well-being.
When we look at history, generally in a bear market riskier asset classes like Small Cap Stocks decline more than Large Caps. Then when the market recovers and shifts to a bull market phase, it is Small Caps that generally lead the rally. That definitely hasn’t happened recently. The chart below shows that Small Cap Stocks (represented by the Russell 2000 Index) have significantly lagged Large Cap Stocks for the last 18 months.
After a brief market correction in 2022 mega cap stocks have been the only game in town. We have discussed before how “The Magnificent Seven” stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) have dominated the returns of the S&P 500. In 2023, the S&P 500 returned 24.2% while the Magnificent Seven rose 75.7%. The bet on AI has pushed Nvidia’s stock price up 172% YTD, and 823% in the last 18 months. This concentrated market performance has caused a similar divergence between Large Cap Growth Stocks and Large Cap Value Stocks.
Economist Herb Stein said “If something cannot go on forever, it will stop.” Watching this performance trend is difficult for those of us who subscribe to evidence-based investing. (Evidence-based means evidence accumulated over 30 plus years, not just one or two.) To those of us who lived through the Tech bubble some 20 years ago, some of this looks extremely familiar. We know that the current trend of Growth/MegaCap/Tech outperformance won’t last forever. We just don’t know how long it will take for the market trends to change.
During this series, we have learned that our own behavioral biases are often the greatest threat to our financial well-being.
It is worth revisiting some of the basics about the stock market, and debunk some common myths.
In the final alphabetical installment of our Behavorial Biases Series, let’s dive into sunk cost fallacy and tracking error regret.
A four-year college degree is expensive. While the numbers vary, the data on the topic is sobering.