The dangers of “recency bias”: Why your brain is wired to focus on the now

When investment markets move sharply, it’s entirely natural to feel unsettled. A sudden fall can make it seem as though more loss is inevitable, while strong periods of growth can make it tempting to believe this will continue indefinitely.

In reality, neither is guaranteed. Markets are influenced by countless factors, including:

• Interest rates

• Inflation

• Company earnings

• Investor sentiment

• Political decisions

• Geopolitical events.

Yet, when headlines focus on what happened yesterday, it can be challenging to stay focused on the bigger picture.

This behaviour is often known as “recency bias”: placing too much weight on recent events when making judgements about the future. 

Allowing recent market movements to dictate your decisions could harm your progress towards your long-term goals. 

So, continue reading to discover how recency bias works and how a disciplined financial plan could help you stay focused on your objectives.

Recency bias can make short-term market movements feel more important than they are

The response to recency bias is understandable, as your brain is naturally drawn to fresh information, especially when it feels threatening or urgent.

This can be useful in your day-to-day life. Indeed, you may be better able to make quick decisions when you don’t have the time to weigh up every possible outcome.

However, investing often requires a different approach.

When markets fall suddenly, your mind may treat the recent decline as evidence of what might happen next.

Rather than seeing volatility as a normal part of investing, you may start to believe that losses will continue.

This can make short-term events feel more significant than they are. For example, if your portfolio falls during a difficult week, you may feel that your long-term plan is no longer working.

Conversely, if one sector, region, or asset class performs well for a short period, you might feel tempted to increase your exposure as you believe it will continue to rise in value.

Both reactions arise from focusing too heavily on what has just happened.

You may end up making investment mistakes if you allow recency bias to cloud your judgement

One of the main dangers of recency bias is that it can push you towards emotion-led decisions at the wrong time.

During a downturn, you may feel tempted to sell investments and move into cash. While this might seem like a way to take control and protect your wealth, selling after markets have fallen could turn a paper loss into a permanent one.

You may also miss out on a subsequent period of recovery. 

Fidelity analysed the UK market’s performance over 15 years, based on the FTSE All-Share Index. MoneyWeek reports that missing the best 10 days of market performance reduced annualised returns from 7.7% to 4.7%. Missing the best 20 days reduced this even further to 2.6%.

Of course, past performance doesn’t guarantee future returns, and investing always carries risk. 

Still, it shows that trying to avoid every bad day could mean missing out on some of the market’s best-performing ones.

When markets are rising, you may feel anxious that you’re missing out on an opportunity, especially if friends or colleagues are talking about a specific investment.

The Financial Conduct Authority found that 66% of 18- to 40-year-old investors make investment decisions in less than 24 hours, while 14% finalise the decision in under an hour.

The same research indicates that 40% regretted investing in overblown opportunities. 

When a recent trend receives a lot of attention, it can become difficult to assess the risks clearly, causing you to invest more than planned, overlook diversification, or take on a level of risk that doesn’t suit your circumstances. 

A disciplined financial plan could help you look beyond the headlines

Recency bias can be incredibly difficult to avoid, and when your hard-earned wealth is on the line, it’s challenging to switch off your emotional response to market volatility.

However, a disciplined financial plan could give you the confidence needed to make informed decisions.

This means your investment strategy is based on your goals, time frame, and tolerance for risk, rather than the latest headlines.

For instance, your plan might account for:

• How long you intend to remain invested

• How much volatility you can tolerate

• How much cash you may need for short-term spending

• How your portfolio is divided

• Whether your investments still reflect your goals.

This can offer some much-needed reassurance during difficult periods. 

And if you believe you’d still struggle to look past the effects of recency bias, it might be prudent to speak to a financial planner. 

We could help you separate short-term market noise from the decisions that truly matter for your future.

To find out more about how we can help, please email info@athertonyork.co.uk or call us on 0208 882 2979.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.