Hindsight bias says to abandon your plan. Here's why you shouldn't.
It's one of the most famous moments in music history—on New Year's Day in 1962, a little-known rock band auditioned for Decca Records execs, but the label promptly rejected them. This group went on to become a worldwide sensation and one of the most influential bands of all time.1 We know them as The Beatles.
Nearly 60 years later, many believe Decca should’ve recognized The Beatles’ talent immediately and predicted their future success. This is what’s called “hindsight bias”—also known as the “I-knew-it-all-along phenomenon"2—a tendency to believe we knew something was going to happen or that we actually predicted it. Hindsight bias exists prominently in investing.3 No matter the market conditions, there are always messages from the media or the investing community that a market event, such as an extreme drop or increase, was foreseen, perhaps even obvious. If you begin to believe you’ve missed opportunities or you’re at risk for losses, you might attempt to overcorrect by trying to time the markets or weighting your portfolio too heavily in one area. Although we can’t eliminate hindsight bias, we can shift our thinking from “I knew it” to “What can I learn from this?” with a few minor actions:
Understand that regret is a normal feeling
It’s natural to feel nervous during periods of market volatility, but don’t let emotions cause you to abandon your long-term investing strategy. A good investment plan comes with frustration at times, particularly when the markets are underperforming. Acknowledge what you’re experiencing and know that others are feeling the same way. The good news is you probably don’t need to make a change to your current investing approach. A recovery often follows a market downturn. Stay focused on your goals and remember that you created this plan for a reason—your grandchild’s college education, your first home, or a comfortable retirement.
Challenge “Monday morning quarterbacks”
Much like sports fans who feel like they’ve foretold a game’s outcome, some investing pundits refer to market upswings or downturns as “predictable.” Then there are those individuals who boast about making millions by putting all their funds in one stock because they knew it would do well, making you feel like you missed out. It can be frustrating to hear you weren’t prepared for a market event or didn’t take advantage of an opportunity. This “noise” may cause you to question your decisions, leading you to overlook the investing strategy you’ve been successful with so far. And consider that your friend who decided to invest heavily in one stock may not be boasting for long if that industry takes a sudden hit.
Focus on (and trust) what works in the long term
“Tuning out the noise” requires concentration on tried-and-true investing principles that can help you meet your goals. Start with clear investment objectives (attainable and tailored to your unique situation), add a broadly diversified portfolio, be mindful of costs, and avoid market-timing. You can’t control the markets, but you can control your investing approach.
Let a tough moment pass you by
This is only a little blip on your investing journey. Reflect on where you are and what you’ve achieved to this point (saving more, making smarter tax choices, or reducing debt). Smart investing focuses on long-term returns, and sometimes good decisions can lead to temporary periods of disappointment.
When hindsight bias creeps in and you start strongly distrusting your strategy, lean on the experts—self-directed resources, industry professionals, or digital or human financial advisors.
Hindsight bias is unavoidable, but don’t let it derail you. Remember the famous record company that rejected The Beatles? They were also responsible for many successful acts (The Rolling Stones and Patsy Cline among them) and innovative recording technology.4 Like them, you’ve made good decisions in the past. Trust those decisions and trust the plan you’ve put in place. And remember that plan the next time hindsight says you’re wrong.
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1,4 Paul McGuinness. Decca Records: A History of the Supreme Record Company. 2020.
2 Ulrich Hoffrage & Rüdiger Pohl. Research on Hindsight Bias: A Rich Past, a Productive Present, and a Challenging Future. 2003.
3 Corporate Finance Institute. Hindsight Bias. 2015.
All investing is subject to risk, including the possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss.