Recency Bias: Why Last Year's Returns Are the Worst Reason to Change Your XEQT Strategy

I’ll be honest with you: there was a moment in late 2023 when I almost blew up my entire XEQT strategy. US large-cap tech stocks had been on an absolute tear, the S&P 500 was crushing everything else, and my globally diversified portfolio felt like it was holding me back. Every headline, every Reddit thread, every conversation at a barbecue was about how much money people were making in Nvidia, Meta, and the “Magnificent Seven.”

I had my finger hovering over the sell button. I was ready to dump my XEQT and go all-in on a US-focused ETF.

Thank goodness I didn’t.

What I was experiencing has a name, and it is one of the most destructive forces in investing: recency bias. It is the reason most individual investors earn far less than the markets they invest in, and it is the reason so many Canadians sabotage perfectly good portfolios chasing whatever happened to do well last year.

In this post, I am going to break down exactly what recency bias is, show you the hard data on how it destroys returns, and explain why XEQT is specifically designed to protect you from it.

1. What Is Recency Bias (And Why Does Your Brain Do This to You)?

Recency bias is a cognitive shortcut where your brain gives disproportionate weight to recent events when making decisions about the future. In plain terms: whatever happened last is what you expect to keep happening.

This is hardwired into us for good evolutionary reasons. If your ancestors saw a predator near the river yesterday, assuming it would be there again today was a smart survival move. The problem is that this mental shortcut is spectacularly bad at predicting financial markets.

Here is how recency bias shows up in your investing life:

• After a great year for US stocks, you feel like US stocks will keep outperforming forever and want to overweight them.
• After a bad year for international stocks, you feel like international stocks are broken and want to dump them.
• After a market crash, you feel like the market will keep falling and want to sell everything.
• After a strong bull run, you feel like the market will keep rising and want to invest more aggressively.

Notice the pattern? In every case, you are projecting the recent past into the future and making portfolio changes based on that projection. And in every case, acting on that impulse is almost always the wrong move.

Why Recency Bias Is So Powerful

Unlike some cognitive biases that feel abstract, recency bias hits you right in the gut. You are not just reading about returns in a textbook – you are watching your own account balance. When your neighbour tells you their US tech-heavy portfolio is up 30% while your XEQT returned 15%, that stings. It feels personal. And your brain interprets that emotional pain as a signal that you need to do something.

But the thing your brain is telling you to do – abandon your diversified strategy and chase what just worked – is precisely the thing that will hurt you most.

2. The “Hot Asset Class” Rotation: What Goes Up Must Come… Sideways

One of the most compelling arguments against recency bias is the simple fact that leadership among asset classes rotates constantly. What was the best-performing region or sector one year is frequently a laggard the next, and vice versa.

Let me show you what I mean. Here is a simplified look at how major asset class categories have ranked over recent periods:

Asset Class Performance Rankings by Year

Returns are approximate category averages in CAD terms. Source: Various index providers.

Look at how the rankings shuffle each year. Canadian equities, which ranked near the bottom in 2019, surged to number one in 2022 when US large caps fell to near the bottom. Emerging markets bounced between ranks seemingly at random. US large caps dominated in several years but had a truly awful 2022.

If you had looked at returns at the end of 2021 and concluded “US large caps are clearly the best asset class, I should go all-in,” you would have been hit with the worst US large-cap performance in years during 2022 – right when Canadian and emerging market stocks were holding up better.

The Decade-Long Trap

Recency bias gets even more dangerous when you zoom out to decade-long trends. Consider this:

• 2000-2009: The S&P 500 delivered a negative total return for the decade. Meanwhile, emerging markets and international developed stocks crushed it. Canadian stocks also outperformed.
• 2010-2019: The S&P 500 dominated everything. International stocks lagged significantly. Many investors concluded US stocks were permanently superior.
• 2020-2024: US large-cap tech continued to lead, reinforcing the narrative from the previous decade.

If you were investing in 2009 and looked at the prior decade, you would have concluded US stocks were terrible and international stocks were the only place to be. You would have been dead wrong for the next decade. And if you are investing today and looking at the past fifteen years, you might conclude international stocks are hopeless. History suggests you would be equally wrong.

The lesson is clear: past performance, whether one year or ten years, does not predict future results. This is not just a disclaimer on fund documents – it is an empirical fact backed by decades of data.

3. Real-World Examples of Recency Bias in Action

Let me walk you through some concrete scenarios that Canadian investors have lived through in recent memory.

Example 1: The Dot-Com Chasers (1999-2002)

In 1999, technology stocks were returning 80-100% annually. Investors could not throw money at tech fast enough. People sold their diversified portfolios, withdrew money from savings accounts, and went all-in on Nortel (which was nearly 35% of the entire TSX at its peak). The logic? “Tech stocks always go up. This time is different.”

By 2002, Nortel had lost over 99% of its value. The Nasdaq was down roughly 78% from its peak. Many investors lost their life savings.

Example 2: The Oil Boom and Bust (2005-2015)

In the mid-2000s, Canadian energy stocks were the hottest asset class in the country. Alberta was booming, oil was heading to $150 per barrel, and many Canadian investors loaded up on energy stocks and Canadian-focused funds. The argument was that Canada’s resource-heavy economy was destined to outperform.

Then oil collapsed. From 2014 to 2015, the S&P/TSX Energy Index dropped by over 40%. Investors who had abandoned global diversification to chase Canadian energy got crushed.

Example 3: The US Tech Exceptionalism Trade (2020-Present)

This one is still playing out, and it is the version of recency bias I see most frequently among Canadian investors today. The narrative goes something like this:

• US tech companies are the best in the world
• They have compounding advantages (network effects, data, scale)
• Why would you own anything else?
• International stocks have lagged for years, so they must be inferior

This reasoning feels airtight. But it is the exact same logic people used about Japanese stocks in 1989, about emerging markets in 2007, and about Nortel in 1999. The point is not that US tech is bad. The point is that concentrating your portfolio based on recent outperformance is a historically terrible strategy.

4. What the DALBAR Data Shows: Recency Bias Is Destroying Investor Returns

If you want cold, hard proof that recency bias destroys wealth, look no further than the annual DALBAR Quantitative Analysis of Investor Behavior (QAIB) study. DALBAR has been tracking the gap between market returns and actual investor returns for over 30 years, and the findings are consistently damning.

The Gap Between Market Returns and Investor Returns

Here is what DALBAR has found over various 20-year periods:

Read that again. The average equity fund investor earns roughly half of what the market returns. Over 20 years, this gap turns into hundreds of thousands of dollars of lost wealth.

Why Does This Gap Exist?

The primary reason is behavioural: investors buy after things have gone up and sell after things have gone down. In other words, they act on recency bias. The DALBAR study consistently identifies the same pattern:

1. An asset class or fund performs well for a period.
2. Investors notice the strong performance and pile in (buying high).
3. Performance inevitably reverts or a correction occurs.
4. Investors panic and sell (selling low).
5. They move to whatever is now performing well and repeat the cycle.

This buy-high, sell-low cycle is not limited to unsophisticated investors. Studies show that even wealthy, educated investors fall prey to the same pattern. It is a deeply human failing.

Canadian investors are not immune. Research from Morningstar shows that the “investor return” (what investors actually earn after accounting for their buying and selling behaviour) consistently lags the “total return” (what the fund itself returns) across Canadian mutual funds and ETFs. The single biggest driver? Chasing recent performance.

5. How XEQT Protects You From Recency Bias

This is where XEQT (iShares Core Equity ETF Portfolio) really shines, and it is one of the reasons I believe it is the single best investment for most Canadian investors.

Built-In Diversification Across 12,000+ Stocks

XEQT holds over 12,000 stocks across 49 countries. This is not diversification you have to think about, manage, or rebalance yourself. It is baked right into a single ETF.

Here is what is inside XEQT:

This allocation means you automatically own:

• US stocks when they are leading
• Canadian stocks when they are leading
• International developed stocks (Europe, Japan, Australia) when they are leading
• Emerging market stocks (China, India, Brazil, Taiwan) when they are leading

You always have a stake in whatever asset class happens to be on top. You never need to guess which one it will be.

Automatic Rebalancing

When one region outperforms and becomes a larger share of the portfolio, BlackRock automatically rebalances XEQT back toward its target allocations. This means the fund is systematically doing what recency bias prevents you from doing: trimming winners that have become overweight and adding to laggards that may be poised for recovery.

This built-in rebalancing is essentially an anti-recency-bias mechanism. It enforces the discipline of buying low and selling high at the asset-class level, without you having to fight your own psychology.

One Decision, No Temptation

Perhaps the most powerful feature of XEQT is its simplicity. When you own a single, globally diversified ETF, there is no “other fund” to compare it to within your portfolio. You do not have a separate US fund, international fund, and Canadian fund sitting side by side, tempting you to sell the underperformer and buy more of the outperformer.

It is just XEQT. You buy it, you hold it, you add to it. The urge to tinker is dramatically reduced because there is nothing to tinker with.

6. My Personal Battle With Recency Bias

I mentioned at the start that I nearly abandoned XEQT in late 2023. Let me tell you the full story, because I think it is one many of you can relate to.

I had been consistently investing in XEQT for a couple of years at that point. My strategy was simple: buy XEQT every payday, regardless of what the market was doing. It was working. My portfolio was growing steadily.

But then something shifted in how I felt about it. The S&P 500 had returned roughly 26% in 2023, driven largely by a handful of mega-cap US tech stocks. Meanwhile, international developed stocks returned maybe 15-18%, and Canadian stocks did fine but not spectacularly. My XEQT, as a blend of all of these, returned something in between – solid, but not as flashy as a pure US-focused portfolio.

I started doing dangerous math in my head. “If I had just put everything in VFV (a Canadian-listed S&P 500 ETF) instead of XEQT, I would have an extra few thousand dollars right now.” I started reading articles about American exceptionalism and how the US would dominate forever. I started following accounts on social media that were loudly proclaiming anyone holding international stocks was leaving money on the table.

The voice of recency bias was loud and persuasive: “The US has outperformed for over a decade. The trend is your friend. Stop fighting it.”

What saved me was going back and reading about previous periods of regional dominance. I read about how Japanese stocks dominated in the 1980s and then collapsed. I read about how emerging markets crushed US stocks in the 2000s, and then reversed. I read the DALBAR studies showing how much money investors lose by chasing performance. And I reminded myself of a simple truth:

The next decade of market leadership is almost certainly going to look different from the last one. I just don’t know how.

I kept buying XEQT. No changes. No switches. And honestly? The peace of mind I got from staying the course was worth more than any potential extra return from a more concentrated bet.

7. The Pattern Is Always the Same

Whether it was Japanese stocks in 1989 (which did not recover to their peak until 2024 – thirty-five years later), emerging markets in 2007 (which massively underperformed for the next fifteen years), or ARKK in 2021 (which lost roughly 75% from its peak), the cycle repeats:

1. An asset class outperforms for a notable period
2. Media attention and investor enthusiasm build
3. Capital flows in (buying high)
4. Returns revert or correct
5. Investors panic and sell (selling low)
6. A different asset class starts to outperform
7. Repeat from step 1

XEQT keeps you invested across all of these asset classes all the time, so you are always participating in whichever region or sector is leading, without having to predict it in advance.

8. Seven Practical Strategies to Defeat Recency Bias

Knowing about recency bias is important, but knowledge alone is not enough. You need practical systems to keep yourself on track. Here are seven strategies I use:

1. Automate Your Investments

Set up automatic purchases of XEQT through Wealthsimple’s recurring investment feature. When the buying happens automatically, there is no moment of decision where recency bias can creep in. The money leaves your account, XEQT gets purchased, and you never have to think about whether “now is a good time.”

2. Stop Checking Your Portfolio Daily

Every time you check your portfolio, you expose yourself to recency bias. If the market is up, you feel validated. If it is down, you feel anxious. Neither emotion is productive. I check my portfolio once a month at most, usually just to confirm my automatic purchases went through.

3. Avoid Financial Media During Volatile Periods

Financial news is designed to trigger emotional reactions because emotional reactions drive clicks. Headlines like “Is Global Diversification Dead?” are specifically crafted to activate your recency bias. During periods of strong market moves in any direction, I deliberately reduce my consumption of financial media.

4. Keep an Investment Journal

Write down your investment plan and the reasons behind it. When you feel the urge to change course, go back and read what you wrote. You will often find that your original reasoning was sound and that your current impulse is driven by recent market moves rather than any change in fundamentals.

5. Study Market History

The best antidote to recency bias is a deep understanding of market history. Some excellent resources include “A Random Walk Down Wall Street” by Burton Malkiel, “Millionaire Teacher” by Andrew Hallam (excellent Canadian perspective), and the annual Credit Suisse Global Investment Returns Yearbook (now UBS).

6. Use the “10-10-10” Rule

When you feel the urge to make a portfolio change, ask yourself: How will I feel about this decision in 10 minutes? (Probably excited.) In 10 months? (Uncertain.) In 10 years? (Probably regretful.) If the decision does not hold up across all three time horizons, do not make it.

7. Talk to Someone Who Has Seen a Full Cycle

If you know an investor who has been through multiple bull and bear markets, talk to them. Almost universally, experienced investors will tell you the same thing: stay diversified, stay consistent, and stop trying to chase what just worked.

9. The Math of Staying the Course

Let me leave you with some concrete numbers to reinforce why sticking with XEQT through periods of apparent underperformance is so important.

Scenario: The Performance Chaser vs. The XEQT Holder

Let’s compare two Canadian investors, each starting with $50,000 and contributing $500 per month. Investor A chases performance and earns roughly 4.5% annually after behavioural drag (consistent with DALBAR data). Investor B holds XEQT and earns the market return of roughly 7.5% annually.

That 3% annual gap – driven almost entirely by recency bias and performance chasing – costs Investor A $370,000 over 30 years. That is a house. That is a decade of retirement income. And it all comes from the inability to resist chasing what just worked.

Final Thoughts: Your Greatest Investment Edge Is Doing Nothing

Here is the irony of investing: your greatest edge is not finding the next hot stock, the next outperforming sector, or the next dominant country. Your greatest edge is the ability to do nothing when every instinct in your body is screaming at you to make a change.

Recency bias is not going away. Your brain will always overweight recent events. But now you know the truth:

• Asset class leadership rotates, and what is on top today will not be on top forever
• The average investor earns far less than the market because of performance chasing
• XEQT is specifically designed to keep you diversified across all major markets
• Staying the course is the single most valuable thing you can do for your long-term wealth

The next time you feel the urge to abandon XEQT because something else did better last year, remember this: that urge is not a signal that your strategy is broken. It is a signal that recency bias is working exactly as evolution designed it to. Acknowledge it, resist it, and keep buying XEQT.

Your future self will thank you.

Disclaimer: This post is for educational purposes only and does not constitute financial advice. XEQT is an investment product that carries risk, including the potential loss of principal. Past performance does not guarantee future results. The Wealthsimple referral link provides a bonus to both parties. Always do your own research and consider consulting a qualified financial advisor before making investment decisions.