Markets and economy

Control your mindset—You can't control the markets

6 minute read
March 10, 2022
Markets and economy

How your brain reacts to volatility—And what you can do about it 

When prioritizing financial goals, you consider how much something will cost and weigh factors like risk tolerance, tax brackets, and investing timelines. You might also take into account why a goal is important to you. How would it feel to be able to buy that house, pay for that tuition, or have that retirement income? 

Investing in your most precious life goals can make you feel emotionally charged, challenging you to contend with uncertainty and doubt. The combination of high-stakes goals and market volatility can compound your emotions. Those feelings are normal and expected—how you deal with uncertainty is what matters in the long run. 

If you understand your emotional motives—the why—you can anticipate your emotional reactions and train your brain to take control in times of volatility. 

Factors that test your long-term resolve

Here are 4 factors that may challenge you to abandon your long-term strategy and tips to help you understand and overcome them. 


1. Negative financial news

Market downturns always come with negative financial news coverage. Alarming headlines can send you jumping to the worst-case scenario. Remember that news headlines don’t take into account your financial goals or timeline. Avoid “overpersonalizing” the news and assuming headlines will directly impact your chance of success. 

Also, beware of opinion pieces that make bold claims without offering an opposing argument. Instead, turn to balanced perspectives. The quantity—and quality—of financial news you consume can directly alter your perception of risk. Recalibrate by focusing on your probability of success and thinking about positive market outcomes instead of the worst-case scenarios.


2. Loss aversion

You probably feel content and optimistic when markets are trending up, and those positive feelings aren’t disruptive. However, when markets are trending down, anxiety and stress could derail your day. That’s an example of loss aversion. Typically, our emotional reaction to a loss is more intense than our reaction to an equally sized gain. And that can lead to risky behavior. 

The best way you can overcome loss aversion is by acknowledging your anxiety head-on and practicing mood management. Lean on friends whose judgment you trust to help calm your concerns. Also, think about how you’d respond to a friend experiencing those feelings. 

Distancing yourself from the situation can help you gain perspective. Consider turning your focus away from your account and toward lifestyle changes within your control, like spending habits or your savings plan. Finally, understand the pros and cons of your account login behavior. If checking your account multiple times a day increases your anxiety, then step away for a longer period. 


3. Need for control

Ambiguous market conditions may leave you wanting to take action in an attempt to regain a sense of control. Reframe how you think about staying the course, and understand that passive choices are actions. You’re choosing to push against the current of panic by sticking to your plan.   

Keep in mind there are things you can do other than pulling out of the market. Update the goal information on your account or isolate a portion of funds for self-management. Even small concrete actions can help you feel more in control. 


4. Hindsight bias

We often overestimate our ability to anticipate an outcome. After an event has occurred, we might think it was obviously going to happen or that we even predicted it and should have reacted differently. When it comes to investing, you’ll always have some regret after a downturn.

Expect those regrets, understand those feelings are unavoidable, and commit to not acting on them. The decision you made only seems obvious now that you know the outcome. Don’t oversimplify the situation and trick yourself into thinking the outcome was predictable.

You can control your mindset

Although you can’t control the markets, you can control your mindset. With a solid understanding of how your brain reacts to volatility, you can have a proactive plan in place. The next time you start to feel uneasy, log in to your Vanguard account to review your goal outlook and regain control. Your goal outlook takes volatility into account and reflects the likelihood that your money will meet your retirement savings goal and last throughout your retirement. When your goal outlook is green, it’s unlikely that market volatility will derail you from reaching your goal.

We know it can be tempting to change the course when markets are unpredictable. But remember, your advisor designed your plan with market volatility in mind.

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