Recency Bias in Investments: Invest for Seasons, Not Weather

y2jmoneytree
Dec 12
3 min read

It is that time of the year again. You open the newspaper or scroll through social media, and you are bombarded with lists: "Top 5 Funds of the Year 2025", "Best Performing Stocks of 2025", or "The Sector that Doubled Money this year"!

It is tempting, isn’t it? As Indians, we love value. Whether it is checking the mileage of a car or the freshness of vegetables, we want the best. But in investing, buying what was the best yesterday may lead to the worst outcomes tomorrow.

This temptation has a name: recency bias! It is the tendency to weigh recent events more heavily than earlier events. In simple terms, it is assuming that because it rained heavily yesterday, it will definitely rain heavily today. Well, it may or may not.

When recency bias hijacks your decisions, your investment planning becomes reactive, not strategic. You keep shifting between “hot” ideas instead of quietly growing wealth for 10–20 years.

The 12-Month Mirage

Why do we fall for this? Because our brains are wired to find patterns. If we see a mutual fund scheme that delivered 30% returns last year while ours gave 12%, we feel need to invest in that fund.

However, investment asset classes in India follow a cycle.

2019-20: Pharma and IT were the heroes
2021-22: Banking and Manufacturing took the lead
2023-24: Small caps rallied hard
2025: Gold/Silver rallied.

If you chased Pharma in 2021 based on 2020 returns, or small caps in 2024-25 your portfolio likely stagnated for the next two years. It may very well happen if you chase Gold/Silver after 2025 rally.

Brain focuses more on recent news and returns, and unintentionally ignores other aspects like history & risk.

Fresh news feels more “true”
Old data feels “boring”
Feeling that it will “continue”

How It Hurts Regular Investors?

Typical pattern:

See a 1-year star fund/sector in news or reels
Shift big chunk of money into it
Cycle turns; new investment underperforms
Feel frustrated, then chase the next hot idea

Result over 10–15 years: Market delivers decent returns; your portfolio returns are lower because you keep buying yesterday’s story at today’s high prices.

Beating Recency Bias

Look at Rolling Returns, not Trailing Returns

Trailing return tells you what a fund did from Point A to Point B (e.g., Jan 1 to Dec 31). Rolling returns show consistency. It tells you how the fund performed across every possible 3-year or 5-year period in its history.

Asset Allocation is Key

The only free lunch in finance is diversification.

Stick to the Goal, Not the Trend

If you are investing for your child’s education due in 2035, does it matter if the Nifty 50 fell by 4% last week? No. Your timeline is 2035. Focus on the destination, not the speed bumps.

Myths vs. Reality

Myth: "If a fund has given 40% returns recently, the fund manager is a genius."
Reality: In a strong bull run, even poor-quality stocks go up. A rising tide lifts all boats. True skill is protecting downside when the market falls.
Myth: "I should switch my SIP to the current top-rated fund."
Reality: By the time you switch, the cycle might have turned. You might act largely on past data, essentially buying high and selling low.

Looking at 1-year returns is not at all wrong. 1-year numbers are a data point, not the only deciding point. Use them along with 3–10 year data, risk, consistency, and your goals.

Conclusion: The View Through the Windshield

Imagine driving on a highway. You check the rear-view mirror occasionally to be safe, but you focus your eyes on the road ahead. Investing is the same. Past performance (the mirror) is useful for reference, but your financial goals (the road ahead) dictate your steering.

Recency bias will always whisper:

“This time is different”
“Don’t miss this rally”
“See how much others made”

But your real life – your kids’ education, your retirement, your parents’ health, your dreams – runs on 5, 10, 20-year horizons, not 12-month headlines.

A simple, behavior-aware approach can help: