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Recency Bias Erodes Discipline and Destroys Investor Returns

Recency bias is the tendency to overweight recent events/trends and ignore long-term evidence. This leads investors to buy after periods of strong performance—when valuations are higher and expected returns are now lower—and sell after periods of poor performance—when prices are lower and expected returns are now higher. Buying high and selling low is not exactly a prescription for successful investing. Yet, it is the way many individuals invest. What disciplined investors do is the opposite—rebalance to maintain their well-thought-out allocation to risk assets.

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