Just a little over a year ago the stock of Facebook was being sold relentlessly and people were advised to avoid it. Now, if you have bought $5,000 of stock about 12 months ago it would be worth over $15,000 today. The stock had a decline, but the overall trend has been higher since it debuted on the stock market a decade ago.
Recently, on a call-in sports radio show, a young caller was complaining that the New York Yankees should no longer be supported, because, as the caller said, “When have they ever done anything?” The answer, of course, is that the Yankees have won 27 World Series championships, a full 16 more than the second place St. Louis Cardinals. Clearly, the Yankees are the top of the heap, but the gentleman could only see from his most recent perspective.
In both above cases it is more important to look at history, logic, or overall trend, rather than to look at what has happened lately. This mistake is called “recency bias.” It is particularly a problem in financial decisions. Whenever investments go down, people worry and sell, usually just at the time smart people would be buying. Conversely, when investments fly upward, we think we should grab more, just when it makes sense that values would cool off. This is why Warren Buffett, one of the richest people in the world, says, “You should be fearful when others are greedy and greedy when others are fearful.”
“People need to understand that recency bias is normal, and it’s hard-wired,” said Charlie Fitzgerald III, an Orlando, Florida-based certified financial planner. “It’s a survival instinct.” It takes a lot of willpower to go against what feels normal.
In sum, it is important for your church to make a plan and stay the course. We had many churches invested at our Foundation who saw their balances drop off alarmingly during Covid. Those that stayed the course not only didn’t lose money that year, but by end of year they had strong gains.
Investments and endowments, by their nature, are meant to rely on long-term trends for the markets. Things will go up and down for a while—perhaps a few months or even a year or two—but history and common sense tell us to avoid “recency bias.”
For more information about stewardship and the care of money, contact us here or call us toll free at 877-391-8811.
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Director of Development
United Methodist Foundation of Indiana