Good for Rohit; this innings came just in wake of the Cricket World Cup, which is round the corner. The selectors must be impressed.
Here is some analysis of Rohit’s performance over the past 1 year:
- In India: 6 innings batted with an average of 103 (including 2 knocks of 200+)
- Outside India: 10 innings with an average of 27
Considering that Rohit’s performance has been inconsistent over the past couple of years, these stats say something. If Rohit has to play World Cup in Australia, he still needs to prove a point.
I don’t have much to do with Rohit’s selection. With Sachin retired, last world cup won and too much of cricket, I have conceded the possession of TV remote to my wife to watch MasterChef (and possibly treat me with some nice dishes ;)) and play Hooplakidz rhymes for my 2 year old son.
Here I am driving a broader point that impacts us, the Recency Bias.
Recency bias happens when a recent event affects/clouds an evaluation which would otherwise have considered various events across the evaluation time period appropriately.
If Rohit is selected on the basis of this superb knock even though his performance in the past 1 year, outside India, has been abysmal, Recency Bias ‘might’ be involved.
There is one important aspect of our lives where the Recency Bias impacts our decisions. That’s personal finance; when we make investment decisions.
Recency Bias in Asset Allocation
It has been observed that investors often seem to latch up to the asset classes that have done well in the recent past and get hurt with that behavior.
It’s again that euphoric time when the news channels are abuzz with the markets creating new highs every day. New investors are pouring into the markets everyday getting influenced by how others have made money.
One must be mindful of the situation.
The first avenue where you must avoid Recency bias is Asset Allocation.
Keep investing consistently with appropriate asset allocation irrespective of the markets.
This means the following:
- No one has been able to time the market. So don’t look for opportunities to invest. Investment should be a habit and done consistently.
- For all your goals have an appropriate asset allocation. If your investment goal is far away, have a higher portion of equity investments (preferably via mutual funds) and if your goal is approaching/short-term avoid equity investments which can be risky.
Don’t panic or get excited by market movements and adhere to your asset allocation.
Here are 7 Simple Investing Mantras, by Ms. Ashu Suyash, CEO, L&T Mutual Fund
Recency Bias in Investment selection
What do we do when we want to pick up a mutual fund to invest in? We typically look at schemes that have been doing well recently and put our money into that.
Recent performance creates the biggest bias while selecting funds. Many of us would have picked up or been recommended funds that have done well in the recent past. Selecting mutual funds on the basis of past performance doesn’t work and one must avoid this Recency bias.
Various factors including risk, return, style of fund manager, consistency of performance etc must be considered while you analyze mutual funds for investment, rather than just looking at past returns.
Point to ponder
We all know that buying low and selling high is the key to making wealth.
Yet, in India, though people buy Gold when it falls even by Rs. 1000, they buy equity only when the stock markets are making new highs; and when markets crash, we panic and sell…. rather than buying. 😉
PS: I am rushing to meet my friend who has been asking me for 2 days: Where do I invest my money that has been parked in FDs for past 2 years?
PPS: While I am done posting this, Rohit is out on 9 in the 5th ODI.