Scott Francis in his final Eureka Report article for 2010 reminds readers that history tells us that we tend to overreact to recent data. He looks specifically at research conducted by Malmendier & Nagel which came to the following conclusions:
Economic events, especially recent events, are more important than historical facts in influencing investment decisions.
Investors who have experienced high stockmarket returns are more likely to participate in the stockmarket and own a greater proportion of shares in their portfolio.
When actual returns are looked at, investors tend to destroy wealth by having too much of their assets in shares after good times, and too few after difficult periods. It's fair to say at the end of a shocking year, at the end of a worse-than-average decade, this evidence is likely to be reasonably relevant.
Scott concludes that we should not look at what has happened over the past year or even decade, rather we should stay in the market, thinking carefully about the asset classes you wish to expose your capital to, and about how you apportion your capital between asset classes.
Click on the link to be taken to Scott's article - Something you must know about 2010.