Yesterday’s Winner, Tomorrow’s Loser? How Recency Bias Can Hurt Investors
By Hradayesh Pathak
Pune, 24th August 2026: When an asset class delivers spectacular returns, investors often assume the good times will continue. They rush to invest after prices have already risen sharply. At the same time, when another asset class underperforms for several years, they lose interest and write it off.
This behaviour is known as recency bias—the tendency to give too much importance to recent events while ignoring longer-term cycles. For investors, it can lead to a familiar mistake: buying high and selling low.
Warren Buffett summarised this psychological trap in his essays, writing: “What the wise do in the beginning, fools do in the end.”
The 2020–24 equity lesson
Indian equities provide a recent example. During the Covid-19 crash in March 2020, the Sensex fell sharply as investors feared a prolonged economic crisis.
However, the market recovered and given phenomenal return in coming years. By 2024, the Sensex touched an all-time high of around 86,000. Strong earnings expectations, rising liquidity and growing retail participation created considerable optimism around equities. Many investors began believing that markets would continue delivering exceptional returns.
After this powerful rally, the market entered a period of consolidation. Returns became more moderate, volatility increased and several stocks and sectors corrected sharply in the following years.
The lesson is simple: buying during euphoria can be risky, while abandoning equities during a crash can mean missing the recovery. Markets can move from panic to optimism—and then to consolidation—within a few years.
Gold’s changing fortunes
Gold tells a similar story. Between 2007 and 2012, gold prices more than doubled, attracting considerable investor interest.
However, gold then went through several weak years. Returns were negative in multiple years between 2013 and 2016. Investors who had bought gold after its strong run were left disappointed.
Yet, after years of poor performance, gold eventually entered another strong cycle.
This shows why recent returns alone should not determine investment decisions. An asset that has performed poorly may not remain weak forever, just as a recent winner may not continue outperforming indefinitely.
Real estate can underperform quietly
During the 2005–2011 property boom, prices in several Indian metros rose sharply. Stories of overnight wealth created a strong FOMO—fear of missing out—culture, encouraging many investors to buy property at high prices.
However, between 2012 and 2020, prices in several micro-markets remained largely stagnant due to excess inventory, high interest rates and regulatory changes. After accounting for inflation, maintenance, taxes and loan interest, real returns were often disappointing.
Real estate does not always correct through a sharp fall. Sometimes, the correction happens through time rather than price.
This is why buying property simply because “prices always go up” can also reflect recency bias.
What should investors do?
This does not mean investors should blindly buy whatever has fallen. A declining asset can continue to decline, and not every cheap-looking investment is a good investment.
Instead, investors should focus on asset allocation and periodic rebalancing.
If one asset class has performed exceptionally well and now dominates the portfolio, investors may consider reducing their exposure to maintain balance. Similarly, an asset class that has underperformed for several years should not be ignored automatically, especially if it still has a sound long-term role.
The best time to buy an asset is not always when everyone is discussing it. Sometimes, opportunities emerge in areas investors have stopped noticing.
Successful investing is not about chasing yesterday’s winners. It is about building a diversified portfolio that is prepared for tomorrow’s opportunities.
(About Author: Hradayesh Pathak holds an MBA in finance from XLRI Jamshedpur and has successfully passed CFA Level 2)
