The effects of recency bias on investing.

Biases are the filters through which we make decisions about everything—from what movies we watch, to what we have for lunch, to what we do with our money. All thoughts are filtered this way. In fact, it's impossible to make a purely unbiased decision.

What is recency bias?

Recency bias is the tendency to place too much emphasis on experiences that are freshest in your memory—even if they're not the most relevant or reliable. Recency bias can lead you to deviate from your carefully laid investment plans and make irrational decisions, like following hot investment trends, which may have damaging long-term consequences.

Recency bias can lead you to deviate from your carefully laid investment plans, which may have damaging long-term consequences.

The problem: The recent past is a poor indicator of the future.

A graphic shows that in 2022 the S&P 500 Index fell 18.1% and that U.S. investors pulled $65.7 billion from large-cap growth funds. It also shows that from January to June of 2023, the S&P 500 Index rose by 16.9%.

Trendy, short-term market moves can potentially sap long-term results, making it more difficult for people affected by recency bias to reach their financial goals.

In 2022, after a decade of low inflation, many investors were shocked when the inflation rate rose to 6.4%.2 Recent experience may have caused them to discount historical examples of high inflation.

In 2021, real estate was one of the best performing sectors in the S&P 500 Index, delivering an annual return of 46%. But if you had chased that trend, you may have been disappointed when the sector returned -26% the next year.3

Keep biases in check by working with a Schwab investment professional.

A Schwab investment professional can be a sounding board for your investing goals and decisions, working with you to overcome any emotional or cognitive biases you may have. We can work with you on your terms, whether it's building a one-time plan, providing ongoing support, or introducing you to new products and solutions.

Put your new insights into action with either managed or self-directed solutions.

Learn even more on our behavioral finance podcast.

Choiceology®

Wharton professor Katy Milkman shares true stories involving high-stakes moments and explores the latest research to help you make better judgments and avoid costly mistakes.

Choiceology with Katy Milkman podcast presented by Charles Schwab

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