Avoid Recency Bias

 In ithought, Market Wrap, Shyam Sekhar

Recency bias hurts the most when a bull market ends. We tend to buy investment ideas which did very well in the recent past. This happens across the board. The stocks in favour remain the ones which hit recent highs and gained the most in the past year. We tend to mechanically buy the dips. Market leadership remains the same and money continues to disproportionately be allocated to stocks and mutual funds with good past performance. We continue to use the recent performance to justify our investment choices. But, that logic is only optically right most of the time. Stock prices know more than we do. When bull markets end, we need to think afresh.

Mr. Market will not continue to react the same way he did in recent corrections. Mr. Market will change his investment preferences and priorities. But, Mr.Market will always shift slowly. And, we mostly fail to read that change even when it is slow. We end up seeing it only when it is too late.

More money is lost chasing investments driven by recency bias. This is a time to shed recency and build a portfolio designed to perform in the future.

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