Recency bias leads investors to place excessive weight on recent performance trends while underestimating other key factors such as fundamentals, valuation, and long-term market trends. Given the nature of financial news, which prioritizes recent events, investors may find themselves overly influenced by short-term developments rather than taking a broader perspective.

However, there are several steps investors can take to counteract this tendency and maintain a long-term focus:

1. Study Long-Term Market History

Analyzing asset-class performance over extended time frames can provide valuable insights. Historical data, such as the IA SBBI indexes, offer asset-class performance trends dating back to 1926. Additional global market data from Elroy Dimson, Paul Marsh, and Mike Staunton extends as far back as 1901. For valuation insights, Robert Shiller’s cyclically adjusted price-to-earnings (P/E) ratio provides data from 1871 onward. Examining such historical records can help investors contextualize market fluctuations and maintain a balanced perspective.

2. Recognize the Cyclical Nature of Markets

Market trends are inherently cyclical, making it important to review performance over rolling periods. For example, U.S. equities outperformed international stocks over much of the past 20 years, but non-U.S. stocks led from 2002 through 2007. Similarly, while growth stocks dominated from 2008 through 2023, value stocks performed better from 2001 through 2008. These patterns highlight that prevailing trends eventually reverse, even though precise timing remains unpredictable.

3. Consider Market Performance in the Context of Economic Cycles

Macroeconomic conditions significantly influence asset performance. From 2009 through early 2022, the Federal Reserve maintained a zero interest-rate policy, implementing rate cuts and quantitative easing that contributed to low borrowing costs. This environment supported bond performance and led to a negative correlation between stocks and bonds, enhancing their role as portfolio diversifiers. However, surging inflation in 2022 prompted a rapid shift in monetary policy, illustrating how economic regimes can dramatically alter market dynamics.

4. Evaluate Alternative Scenarios

When assessing market outlooks, it’s useful to consider counterfactuals. As Warren Buffett once noted, “You pay a very high price in the stock market for a cheery consensus.” If the majority opinion is already reflected in market prices, potential gains may be limited, while unexpected shifts can lead to losses. By questioning dominant market narratives and exploring overlooked factors, investors can avoid herd mentality and make more informed decisions.

5. Automate Investment Decisions

Setting up automated investment processes can help mitigate the influence of short-term biases. Establishing a long-term asset allocation strategy and rebalancing periodically ensures portfolio discipline. Additionally, contributing a fixed amount to investment accounts—such as through a 401(k) or workplace retirement plan—fosters consistent saving habits that are less affected by market fluctuations. Maintaining a written investment policy statement outlining asset allocation targets, selection criteria, and rebalancing parameters can further reinforce a structured investment approach.

By adopting these strategies, investors can maintain a long-term perspective, reduce the impact of recency bias, and build more resilient investment portfolios.