Recency Bias: How To Avoid The Trap?
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Recency Bias is a psychological phenomenon where a person remembers events that have happened recently compared to the one that happened a while back.
Recency Bias In Investing
In investing, Recency bias is the tendency of investors to make decisions based on the recent events.
Whenever the markets fall significantly in the near term most of the investors get panic and don’t invest in the markets, similarly when the market starts giving decent returns most of the investors try to chase those returns by investing at its peak.
You can see similar situations going around us during this Coronavirus Pandemic, most people are scared of stock markets because of the recent significant falls. They feel that markets are falling and it will keep on falling so based on these recent events they don’t invest in it.
On the other side, Gold prices are increasing like crazy and the same investors are redirecting their investments into gold because they don’t want to miss the rally in gold prices.
They are the same person who never gave a damn about gold prices when it was not moving from the last 6 to 8 years. Investors who invest only based on the recent events falls in a trap with such decisions. These decisions will never lead them to enormous wealth creation through investing.
Because by doing this they are investing based on the events and not based on the underlying behavior of the asset.
Avoid The TRAP!
You can avoid this trap by working on three things,
Managing Asset Allocation
Asset Allocation is very important if you are not clear from the beginning of your portfolio management then you will be disappointed over the long run because you must be clear about the proportion of allocation into the assets.
It is advisable to maintain the proper balance between the asset and its allocation. You can refer to an article I wrote earlier on asset allocation to know more about it.
Don’t Be Swayed by Recent Returns
If you are the one who looks around the latest performance of any fund, stock, asset, and gets swayed by it and takes a decision for your portfolio, then don’t do it. This is not the strategy this is a Trap. Don’t get swayed by returns, choose valuations of assets, not recent performances.
Focus On Your Goals
To avoid the trap of recency bias you must focus on your financial goals for which you are investing and the one you want to achieve sometime in the future.
This will help you to avoid the trap and you will do better than the 98% investors who will still fall for recency bias no matter what, it’s in human DNA – And YOU have to avoid it!
Hi, I’m Managing Director at Gurpreet Saluja Financial Services where I help my investors to invest in mutual funds and achieve their financial goals. I’m also a Value Investor and here I write about Personal Finance & Investing.