Definition
Recency Bias in Fund Selection
Recency bias in fund selection is the error of choosing mutual funds mainly on their latest short-term returns, expecting that recent outperformance will persist.
Star ratings and 'top performer' lists tilt toward funds that did well recently, drawing investors in just as those funds may be poised to mean-revert. Chasing last year's winner often means buying high and being disappointed as leadership rotates among categories and styles.
A sounder approach weighs long-term, full-cycle performance, consistency, costs, the manager's process and how the fund fits your asset allocation — not just trailing one-year numbers. Recognising recency bias helps you avoid a costly cycle of switching into whatever was hot last.
Related terms
- Recency BiasRecency bias is the tendency to give too much weight to recent events and to assume the latest trend will continue, while ignoring longer history.
- Behavioral FinanceBehavioral finance is the field that studies how psychology and cognitive biases affect the financial decisions of investors and markets, departing from the assumption of perfectly rational actors.
- Hot Hand FallacyThe hot hand fallacy is the mistaken belief that a recent run of success will continue — for instance, that a fund or trader on a winning streak is bound to keep winning.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.