Recency bias: a cognitive bias that gives greater importance to the most recent events. It’s natural. It’s human. Even the most historically literate of us have trouble putting major current events into a long-term perspective, especially when those events are unpleasant to experience. Sure, you know people in the Middle Ages barely had enough daily food; you know Americans of previous generations had to suffer catastrophic wars and poverty; and you know living in 2022 means your material well-being is overall the most comfortable in human history. But, despite knowing these facts, I can picture you thinking, “Yes, but I’m alive now, and I’m anxious now.” There is nothing inherently wrong with thinking that the sky is falling, economically or societally. But we need to evaluate current events and their economic impact from a historical perspective to put your mind at ease.
First things first: we don’t intend to diminish the severity that many current events are having on actual people’s lives. Real people are suffering from the war in Eastern Europe. Real people are struggling financially with major inflation in the United States. We can’t, as decent people, downplay the very real suffering. And even if a person is not directly suffering from an unstable world, that same person might feel real anxiety while witnessing disturbing events. From a historical perspective, however, our current troubles are common.
We don’t even have to dig too far back into our history textbooks. Wars, invasions, terrorism, assassinations, natural disasters, worldwide pandemics, and stock market crashes. We could compile a list of hundreds of scary, momentous, historic, world-shaking events from the past 60 or 70 years. Real events. Real people. Real anxiety. Sometimes, a real tragedy. But guess what? We’re still here. More importantly, the global economy is still here.
Since the S&P 500 Index was established in its current form in 1957, the inflation-adjusted return on an investment made in 1957 is about 6,494%[1] Yes, you read that correctly. The terrible events of the last half-century somehow weren’t bad enough to stop the growth of the American economy. The economy flourished. Sure, there were ups and downs. The stagflation of the late 1970s. Black Monday in 1987. The dot-com bubble of 2000. The 2008 financial crisis. CCOVID-19 in March 2020. We remember those events. At the time, the world felt like it was spinning out of control. Very scary times, indeed. But, most importantly, very temporary. Yes, the global economy is still here, and you still want to be a part of it.
Moral of the story: don’t let the recent news get you down. Global disruptions to the economy are the norms, not the exceptions. The pessimism of early 2022 is not the first anxious time to be an investor, and it won’t be the last. Take a deep breath, gain some perspective, and remain steadfast. Learn from history. It will pay off.
Notes:
[1] U.S. Bureau of Labor Statistics
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