Don’t Stress About Things You Have No Control Over
Don’t Stress About Things You Have No Control Over
Posted by TEBI on February 28, 2020
By Jonathan Clements
Here’s the least surprising thing you’ll read this week: you can’t control the financial markets. They’re driven by news — and we simply don’t know what news we’ll get in the weeks and months ahead, whether it’s about the spread of the coronavirus, its impact on the global economy or something else entirely.
But don’t despair. There’s also much that we can control, including how much we save and spend, the amount of investment risk we take, how much we pay in investment costs, our portfolio’s tax efficiency and — most critically at a time like this — our own emotional reaction to market ups and downs.
Indeed, if you were going to design a laboratory experiment to test investors’ mettle, this past week would provide a nearly perfect template. Think about it. We have a virus without a vaccine that’s spreading rapidly — but nobody knows how rapidly — which is damaging the global economy — but nobody knows how badly — at a time when many U.S. stock investors were already anxious after an extraordinarily long bull market that has pushed valuations to worrisome levels.
Feeling unnerved? It would be shocking if you weren’t. Think about all the ways that this year’s market action has messed with our heads.
Recency Bias. In 2019, the S&P 500 stocks were up an impressive 28.9%, excluding dividends. This year, they’re down a fairly modest 7.8%. Which number are we focused on? You already know the answer. Instead of celebrating the huge gains enjoyed over the past decade, investors are fretting about the relatively modest losses suffered this year. Our thinking, alas, tends to be heavily influenced by whatever’s happened most recently.
Extrapolation. The S&P 500 has given up 12% over the past six trading days. The temptation is to take the past week’s losses and extrapolate them into the future. But that would be a classic investor mistake: We imagine we can forecast returns simply by looking at past performance.
Loss Aversion. Recent stock losses — and our sense that more damage may lie ahead — is enough to cause many folks to panic. We simply loathe losing money. Indeed, experts in behavioral finance suggest we get at least twice as much pain from losses as pleasure from gains.
Anchoring. As of yesterday’s market close, the S&P 500 had fallen back to levels last seen in mid-October. If somebody had told you in mid-October that U.S. share prices would tread water for the next four months or so, you likely would have shrugged. But instead, we’re anchored on the S&P 500’s Feb. 19 all-time high and the 12% decline since then.
To continue reading, please go to the original article here:
https://www.evidenceinvestor.com/dont-stress-about-things-you-have-no-control-over/