Recency effect is difficult to shrug off

If in the year you are bombarded showing you slides that gold, real estate (would you believe it?), some commodities, and EVEN SAVINGS BANK account or a money market mutual fund have done better than equity over the past 10 (yes repeat ten) years, what would you do?

Obviously you will stay away from equities, and put all your money in gold or real estate, correct?

Well that is what is happening to the poor American investor.

The stock markets in the US have returned -0.5% (nominal terms) – and obviously much worse in real terms.

Cut to the Indian scenario. Over the last 10 years the Indian equity markets have returned 20% + dividends on the sensex – thanks to the low starting point in 2001. Obviously gold has done better than debt markets, real estate in certain locations have done well – and since there is no trustworthy index you cannot say what has happened in INdia in real estate.

So today the Indian investor laughs at debt products, is convinced that equities will give 20% cagr, and gold will at least double over the next 2-3 years,….etc. etc. Why does this happen?

Well that is the recency effect. You think tomorrow will look exactly like today….well it does not always happen.

What to do?

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2 Responses to “Recency effect is difficult to shrug off”

  1. > What to do?

    Close eyes and smile.


  2. I had recently read about “recency effect” while understanding Behaviorial finance . I can understand things more now 🙂


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