Jonathan Clements reminds us that here\u2019s the least surprising thing you\u2019ll read this week: you can\u2019t control the financial markets. They\u2019re driven by the news \u2014 and we simply don\u2019t know what news we\u2019ll get in the weeks and months ahead, whether it\u2019s about the spread of the coronavirus, its impact on the global economy or something else entirely.<\/p>\n
But don\u2019t despair. There\u2019s also much that we can\u00a0control<\/a>, including how much we save and spend, the amount of investment risk we take, how much we pay in investment costs, our portfolio\u2019s tax efficiency and \u2014 most critically at a time like this \u2014 our own emotional reaction to market ups and downs.<\/p>\n Recency bias.<\/strong>\u00a0In 2019, the S&P 500 stocks were up an impressive 28.9%, excluding dividends. This year, they\u2019re 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\u00a0fretting<\/a>\u00a0about the relatively modest losses suffered this year. Our thinking, alas, tends to be heavily influenced by whatever\u2019s happened most recently.<\/p>\n Extrapolation.<\/strong>\u00a0The S&P 500 has given up 12% over the past six trading days. The temptation is to take the past week\u2019s losses and extrapolate them into the future. But that would be a classic investor\u00a0mistake<\/a>: We imagine we can forecast returns simply by looking at past performance.<\/p>\n Unstable risk tolerance.\u00a0<\/strong>Will those big investment bets involve stashing more in stocks or bailing out? Which way folks jump will likely depend, in part, on how recent market action has affected their\u00a0tolerance<\/a>\u00a0for risk. In theory, we\u2019re supposed to figure out how much risk we can stomach and then build a portfolio that reflects that. In practice, our appetite for risk tends to rise and fall with the financial markets \u2014 and right now a lot of investors are likely discovering they aren\u2019t nearly as brave as they imagined.<\/p>\n The illusion of control.<\/strong>\u00a0Faced with danger, often our instinct is to act. That can make us feel more in control of our destiny \u2014 but it may not be good for our financial future. Most of us hold a portfolio built to help us pay for retirement and other goals in the decades ahead.<\/p>\n