4. Investment cycles are normal
We have experienced a prolonged market cycle recently, where large-cap growth stocks have been a top performer. Without caution, investors may succumb to recency bias given the recent cycle.
Simply put, recency bias can be defined as most easily remembering something that has happened recently, compared with remembering something that may have occurred a while back.
Recency bias can lead investors to question fundamental investment disciplines, such as diversification. Instead of remaining disciplined, temptation may rise to concentrate allocations toward investments that have recently outperformed.
It is absolutely normal to experience multiyear cycles where certain asset classes outperform consistently, only to reverse course in the following cycle. Two areas that are good examples are growth versus value stocks, and U.S. versus international stocks.