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    Rising Stock Market: Donít become victim of recency bias

    ďRecency bias is the phenomenon of a person most easily remembering something that has happened recently, compared to remembering something that may have occurred a while back. In other words recency bias is the tendency to weigh recent events more than earlier events. What better place to analyse recency bias than stock market, particularly in India. While investors across the world become victim of recency bias, it sounds more pronounced in case of India. In India, investors defying law of demand start chasing stock market, extremely driven by most recent news and events.

    The recent turn around in stock market has raised hopes that retail investors, who had left stock market post 2008 events, are likely to make come back. After all, market is at all-time high. Sense of euphoria not seen for a long time has made a comeback and bears seem to have left market for some time to come. Some stocks like SBI, Coal India etc. have given the kind of return which was just unthinkable till some time back. Mid cap as well as small cap stocks are doing well. If the market continues to this kind of performance for some more time, will retail investors be back in the market? While the answer is not known, recency bias may drive investors to the market.

    Stock market has seen a trend of consolidation post first few rounds of elections and after election results have become even stronger. At this stage, sentiments have become so strong that 2008-2014 bear phase have been completely forgotten. Considering the scenario should the retail investor enter market? It is important for the investors to understand investment decisions are not driven by the news and events, especially in equity. For consistent value creation, an investor has to make long term investment decisions. This is applicable for those investors who wish to take risk and remain invested in the stock market.

    Entry for new investors in the stock market at current juncture can prove out to be counterproductive. It is possible that market corrects itself after spectacular rise and the impact is felt by the first time investor. Historically, Indian investors have been found to enter market at high and leave it when market is down. It is possible that investors may fall victim to the rising markets and enter market now. Even if an investor is planning to enter market now, he must be ready to stay in the market for long period of time. Investors and traders approach market with different perspectives. Investors should not have short term view of the market and try to make quick money out of the market.

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