The Only Thing You Can Control

In 2020 the global economy shut down. Even with the financial consequences, the S&P 500 is up 2% for the year. A year ago, no one saw a pandemic coming and a few months ago no one saw stocks recovering.

The world is unpredictable. The stock market, fuelled by the emotions of unpredictable people about our unpredictable world is many times more so.

Stock returns are volatile. This holds true for individual holdings and as well as diversified portfolios.

Since inception, the S&P 500 has averaged a 10% annualized return. In its near 100 year history, there's only been a handful of times where it returned 10%. The average is nothing to count on.

You never know where stocks going. The smartest minds have tried, putting together sophisticated models to play fortune teller. Many have been burned doing so.

Models are built with massive amounts of past data. Unfortunately, things that's never happened before happen all the time. Events like Black Monday (1987), the Great Financial Crisis (2008) and the Flash Crash (2010) are impossible...based on the models.

You can't control your investment returns, there are too many unknowns. However, you can control the amount you save. Many investors work tirelessly to squeeze out a few basis points of outperformance. This is inefficient. You can accomplish the same goal by simply saving a bit more.

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The Art of Giving Feedback

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Negative Feedback, Positive Lessons

In the battle against plastic bags, a five-cent tax was shown to be much more successful at deterring usage than a five-cent credit for bringing your own bags. Carrots satisfy but sticks sting, and they sting hard. So we default to the less painful choice of avoiding loss. Loss aversion impacts the way we process information. A 2019 study invited participants to learn through a series of multiple choice questions. Each question only had two options to choose from. Whether guessing correctly or not, they would still learn the right answer. Despite the identical learning opportunity, participants were much more successful at recalling the answers they guessed correctly than those they got wrong. "You're right!" feels good. We savour the moment, analyzing every detail. "You're wrong!" stings. We want to quickly forget, dismiss, and move on. When we succumb to loss aversion, we miss opportunities to learn. Failure is part of the process. We'll experie...

Herman Ye

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