Recency bias after a good year: the risk of overconfidence
After a year when markets return twenty-five or thirty percent, every investor feels like a genius. The decisions all look brilliant. The SIP that was started nervously is now a vindication. The allocation that felt aggressive now feels conservative. The urge to increase equity exposure — to "put more to work" — is almost irresistible.
This is recency bias. The tendency to weight recent experience more heavily than long-term averages. And it is most expensive when it feels most natural.
After a strong year, families tend to do three things that look reasonable and are quietly dangerous. They increase equity allocation beyond their plan — because "equity is clearly the best asset class." They start new SIPs in higher-risk funds — small cap, thematic, sector — because "the market is strong." And they reduce or neglect their debt and emergency allocations — because "why hold six percent when equity gives thirty?"
Each of these decisions is based on the assumption that next year will look like last year. It rarely does. A thirty percent year is often followed by a flat or negative year — not because markets are mean-reverting by magic, but because valuations that fueled the rally need earnings to catch up.
The plan should survive your best year as well as your worst. If a strong market makes you want to change the plan, the plan is doing its job — because the plan was designed for all markets, not just the recent one.
At Dhansanchay, post-rally reviews are as important as post-correction reviews. Both test discipline. The correction tests your ability to hold. The rally tests your ability to resist. In my experience, the second test is harder.
At Dhansanchay we see the best outcomes when the plan is boring on paper and steady in execution. Written for general education — not as individual investment, tax, or legal advice. If a point touches your situation, discuss it with a qualified advisor.