Few months back, a client told me to expedite his STP (systematic transfer plan) duration from debt to equity which I had set for 6 months. Reason – he had got the news that Sensex is going to touch 85,000 very soon. Another client, confident about the current government returning to power wanted to over-commit to equity beyond his risk appetite.
This behaviour based on the current stock market rally is known as recency bias in the world of investing. Investors give more importance to recent short-term performance rather than basing their decisions for the long term. Such myopic approach skews their ability to accurately evaluate their own financial situation, asset allocation and take investment decisions.
It is a forgotten fact that markets are cyclical and tend to revert to their historical mean, clearing the froth. While the current phase of greed will eventually be replaced by fear, this chart below is a good reminder to brace for volatility and ride out the downturns.
As per a report from FundsIndia, since 1980, the Sensex has witnessed intra-year declines (largest drop from peak to trough) over 44 years. Of these, 40 years of markets have witnessed intra-year declines of more than 10 per cent, which is 91%. Yes – every year. Despite such volatility, Sensex has yielded positive returns every year in 35 out of 44 years. Even if we consider the severe intermittent crisis of the last 2 decades like the global financial crisis (-61%), European debt crisis (-28%), Covid pandemic (-38%), Indian markets have gone up over the long run mirroring the earnings growth.
Source: FundsIndia
The best way to tackle recency bias is to stick to one’s asset allocation and financial goals. There will be a lot of television experts and finfluencers on social media giving their valuable opinion about the markets. When the cycle will turn, these same experts will start predicting the market bottom. Take them with a pinch of salt. Decisions should be guided by one’s personal financial situation rather than being influenced by media chatter. Engaging a financial adviser can also help to take a bird’s eye view of the investment portfolio and avoid typical mistakes of timing the market and haphazard approach to investing.
As quoted by John Train – For the investor who knows what he is doing, volatility creates opportunity!
Also read: https://goalbridge.in/should-you-book-profits-in-the-stock-markets-now/