Are You Suffering from Recency Bias?

May 11, 2021  |  Michael Reilly

Recency bias is a cognitive bias that gives greater importance to the most recent events. 

Recency bias in investing can cause investors to stick with something that worked previously, assuming it will continue to work today. 

Ok, I’m with ya so far you say… Stick with me – my point is this isn’t 2020. 

What worked in 2020 isn’t working in 2021. Last year it was all about the “stay-at-home” stocks. Everything from Amazon and Netflix to Zoom. 

Last year was all about growth stocks and Tech. But, have you noticed that isn’t working this year?

This year it’s Value over Growth – Financials over Technology. 

Tech has dropped from the #1 ranked sector to the #6 ranked sector – replaced by Financials, Basic Materials, Energy and Industrials.

When was the last time you saw relative strength like this coming from Financials and Materials?

This week we saw 75% of Financials hit new 52-week highs. That’s the most in over a decade.

Bullish breadth thrusts like these are classic characteristics of the beginning of bull market cycles, and NOT things we see near the end…

Meanwhile, both Technology stocks, and Growth in general, just went out at new relative lows. Welcome to 2021 and the new investment paradigm.

Tech and Growth are NOT where the strength lies today. In fact, this is one of the weakest.

So, tell me again why so many investors continue to ignore the leadership of Value stocks? 

Value stocks just put in the highest 63 days (a quarter) breadth reading since 2016. That means more value stocks are participating in value’s resurgence than any time in the last 5 years.

But investors suffering from recency bias will continue to ignore it.

All you “growth investors” out there are so certain it’s gonna change any time now. My message to you – “You just hold that thought”. Good luck.

Here’s how I see it, the only way to make sure you own the strongest stocks is to buy the strongest stocks. Simple right?

One way we do that is to sort by relative strength, positive momentum, and proximity to new highs. It’s the reason relative strength remains the cornerstone of our investment process.

And today, the areas that are rewarding investors are in value stocks over growth – in Financials, Basic Materials, Industrials. Not in Tech. 

If you find this of value and would like more information about our investment process, sign up for a consultation?



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