With the current economic crisis in full swing, it’s easy for us to fall into the recency bias trap. In psychology, the recency effect is the tendency to remember more recent events or observations more vividly and give recent information more weight than historical information. Unfortunately, this recency bias could cause you to abandon your long-term strategy and hinder your ability to make rational investment decisions.
Recency bias in investing can manifest itself in many ways. For example:
When you are making this type of decisions, you are letting recent events affect your long-term strategy to the point of abandoning what you once considered sound strategy. Sometimes, things will work out in your favor, but historically we know that it’s not wise to react in this manner.
Here are the likely outcomes:
Letting news and recent events drive your strategy is never a good thing. Instead, you should build a strategy that could weather both the ups and downs. This could be as simple as:
You may feel the urge to react to recent events and news, but history tells us that this is not the best course of action. As such, it’s best to find a strategy that works for you and stick to it.