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Recency bias occurs when investors or clients focus solely on the activity of the market on a short-term basis.

When it comes to finance and more particularly investing, the general public places an extreme interest in a purely analytical version of investment practices.  There is, however, a psychological aspect of financial services that is often overlooked. One of these psychological phenomena is recency bias. Recency bias occurs when investors or clients focus solely on the activity of the market on a short-term basis.  Essentially, that means that investors look only at what the market has done recently, as opposed to over the long term. With the seemingly endless swings the market has encountered over the last few weeks, recency bias is an important market-facing tool to look at.  This is not the first time a bull market has turned into a bear market. This is not the first time the market has swung from all-time highs to remarkable lows. With this blog, I hope for all readers to understand that this situation will get better, just as it has in the past, and just like it will in the future.

Due to recency bias, when a bull market ends, the public fears that the market will continue to plunge in perpetuity.  This is the most common example of recency bias; the belief that one bad day will lead to another, and another, and another.  Rather than extrapolating past information, which generally shows market correction among great swings, investors follow the most recent trends.  That means falling victim to recency bias and following the herd mentality, which, in this case is the selling off of stock. The market has had an unprecedented bull market over the last ten years.  Gains have been at an all-time high, with major drops happening few and far between. Thus, the turn the market has taken towards a bear market has been increasingly scary, especially for those with their retirement fund wrapped up in the stock market.  However, looking passed recency bias tells us that bear markets do not last forever. For instance, look at the 1987 market crash. It is considered one of the all-time bull markets. However, when you look deeper at a long-term chart, it was actually small when figured into the grand scheme of the market.   Essentially, this means that what we are experiencing now may wind up being small in comparison to the recovery that will take place.  

Recency bias is extremely common especially during bear markets, and affects people regardless of the time frame, or, the standing of the market.  It happens during bull markets as well, when you think the gains will never end. However, I am here to urge you to deny the recency bias that seems somewhat implicit when it comes to bear markets, or a downturn in the market.  As difficult as it may seem to imagine, we will get through this and, we will come out stronger than ever. Do your best to see past what has happened in the last few weeks. If you look back to 2008, you would have thought it would be impossible to imagine a strong market with seemingly endless returns.  However, that is exactly what happened and it lasted nearly 10 years. Do not let recency bias dictate your actions. Trust in the fact that the market always corrects. We will get through this and I am here to help you.

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