In this thought-provoking article, Chicago Global’s advisor Larry Siegel and Paul Kaplan of Morningstar discuss the hazards of extrapolating data from the best performing stock markets over the past 120 years, an era marked by unprecedented wealth generation. Investors risk forming overly optimistic beliefs based on the performance of markets that survived and thrived during this period. Bias arises when failed investments go unobserved or are ignored. Larry and Paul show that equity markets fared best in countries with stable governments, expansive immigration policies and resilient economies.
A key take-away is that survivorship bias, along with behavioral biases — including familiarity, trend-chasing and disposition effect biases — lulls investors into believing that whatever had been profitable in past will continue. Investors must resist the impulse to chase recent performance and hold concentrated static portfolio, as these strategies are prone underperformance. A regularly rebalanced portfolio broadly diversified across assets and geographies is a more effective investment strategy over the long-term.