Recency And The Last Twelve Months

Expectations about future returns track recent returns closely. Surveys of investor sentiment tend to be most optimistic after prices have risen and most pessimistic after they have fallen.

Why recent data feels more informative

Recent events are easier to recall and come with more detail attached, which the mind reads as evidence of relevance rather than as an artifact of memory.

Distant periods survive as summaries. A decade-old decline is a fact; last quarter's decline is an experience with a texture to it.

Weighting the vivid over the merely known is efficient in most of life, where recent conditions genuinely predict near-term conditions. Markets are the exception.

The extrapolation this produces

A run of strong returns generates the expectation of more, which raises the price people are willing to pay and reduces the return available from that point.

A run of poor returns produces the reverse, with willingness to pay falling exactly when future prospects have improved.

The pattern is self-defeating in aggregate, which is why flows into asset classes commonly peak after strong stretches rather than before them.

Where it shows up in fund selection

Ranking tables and platform interfaces sort by recent performance, and money follows those rankings. The categories drawing inflows are usually the ones that have just performed.

Because performance across strategies tends to alternate over long periods, buying the recent leader has often meant buying near the end of its run.

This is one contributor to the gap between fund returns and the returns investors in those funds actually experience.

Why longer windows help unevenly

Examining longer histories is the standard remedy, and it does supply context that a twelve-month view lacks.

But a ten-year record is still dominated by whatever regime prevailed over that decade, and it can encode an unusual period as if it were normal.

Reading history usefully means asking what conditions produced the record, not just how long the record is.

The practical counterweight

Written rules made in advance are the main defense, because they were set when recent experience was different from what it is now.

Rebalancing enforces the opposite of extrapolation mechanically, trimming what has risen and adding to what has fallen without requiring a forecast.

The discomfort of following such a rule is the sensation of recency being overruled, which is what the rule was written to do.