How to be an Active Investor

How to be an Active Investor

What does the expression “active investor” mean to you? Does it make you think of someone who is constantly buying or selling investments, and moving his money around from one place to another in hopes of generating a profit? Here’s news: you can be an “active investor” even without actively buying/selling. Churning your portfolio will do you little good, and could actually create negative results. Simply buying or selling an asset in order to “do something” – as opposed to following your financial plan – is a serious financial mistake. Active investing means making sure to put your funds in the most productive places you can find… even parking them there for the long term. Active investing is making sure your money works for you. Active pieces on the chessboard Being an active investor is similar to being an active chess player. How is that? To take an analogy from the world of chess, consider the 1993 game when Susan Polgar played Vasily Smyslov. Here’s how Susan describes her win against him in Rich As A King: “When I played Smyslov in 1993 in Vienna, I placed my white bishop near the corner in square g2, where it stayed for 20 moves. Without constantly adjusting it, nor trying to find a new idea, I just left this well-placed bishop in an ideal spot. The volatility on the board certainly made me reconsider my strategy, but I knew that having a solid asset in the right square would, in the long run, help me to succeed. And when I finally deployed this powerful piece, I was able to chip away... Click for more
How to Avoid the Illusion of Attention (Which Could Cause You to Lose Lots of Money)

How to Avoid the Illusion of Attention (Which Could Cause You to Lose Lots of Money)

Are you really paying attention to what you’re reading, or is it just the “illusion of attention?” Are you merely going through the motions, in effect sleepwalking all day long? Can not paying attention cause you to lose money? Imagine that you are playing a game of chess. You look intently at the board and see all the chess pieces laid out clearly in front of you. You’re absolutely sure you know what’s going to happen in the next move or two because it all looks so obvious. Then, out of nowhere, your opponent surprises you with an unexpected move. How could he surprise you if you were paying such close attention to the board? The reason for this is what psychologists refer to as the “illusion of attention.” It occurs when people believe that they see an entire scene, but they actually miss what’s right in front of their eyes. Cognitive psychologists Christopher Chabris and Daniel Simons wrote about the illusion of attention in The Invisible Gorilla. Many people suffer from this phenomenon, including experts and individuals in positions of responsibility. Among the examples that Chabris and Simons give in their book are an experienced airline pilot who did not see a plane on the runway where he was about to land, and a veteran nuclear submarine captain who could not see a 200-foot fishing boat that was right in the middle of his periscope view screen. Why do you miss important details? One of the main reasons why you don’t see important details, though they may be right in front of you, is because you simply don’t... Click for more
Why Conservative Investments Are Not as “Safe” as You Think

Why Conservative Investments Are Not as “Safe” as You Think

Conservative investments, such as bank savings accounts or CDs (certificates of deposit in a bank), may not be as safe as you think. These types of accounts may actually produce negative real return rates over the years. Three main factors are responsible for negative return rates: Low interest rates Inflation Taxes Low interest rates Years ago, interest rates on bank savings accounts or CDs rates ranged from 3% – 6%. These days, interest rates are close to zero, generating almost no revenue. Low interest rates create a specific problem for retirees because when they originally invested their money, they expected to make a higher return rate than what they receive now. As a result, their savings may not have as much purchasing power as previously. Inflation Inflation erodes the value of your money while it sits in the bank. For example, what would happen if an investor put $100 into a bank savings account earning nearly no interest? That year, $100 is enough money to buy a leather jacket. But what if, when he retrieves the money the following year, inflation raised the jacket’s price to $105? In that case, the initial $100 is no longer enough to buy the jacket, so the $100 is worth less than the previous year. This change in money’s value is called “inflation.” Taxes Paying taxes is an ongoing expense, which lowers your net return. When interest rates are low, and inflation reduces the value of your money, taxes top it all off, resulting in negative return rates, even in so-called “safe investments.” How to profit with bond ladders when interest rates are... Click for more
Are There Disadvantages to Being a Confident Investor?

Are There Disadvantages to Being a Confident Investor?

Who is usually a more confident investor – a man or a woman? When Professors Terrance Odean and Brad Barber conducted a study of 60,000 individual investors, they found that the male investors were far more confident in their investing decisions than their female counterparts. But is an abundance of confidence always a good thing? Overconfidence on the chessboard When chess players are too confident, they overestimate their ability, sometimes to the extent that they refuse to believe their opponents could win. In many cases, this overconfidence leads to failure. Even though overconfidence may lead to failure, many chess players are overconfident in their outlook. Why? In the book The Invisible Gorilla, Christopher Chabris and Daniel Simons describe a study where they asked tournament-level chess players two questions: What is your most recent official chess rating? What do you think your rating should be to reflect your true current strength? Given the rigorous methodology used to calculate chess ratings, the two answers should have been the same, or at least very similar. However, 75% of the respondents claimed that their actual score underrated their true ability by about 100 points. Even if statistics told them the opposite of what they believe, they were overconfident in their self-analysis. What is an overconfident investor? Overconfident investors tend to trade more actively than others. After all, they feel they have a solid grasp of how the market works, and good picks for winning investments. In the study of individual investors conducted by Professors Odean and Barber (mentioned above), single men traded 67% more actively than single women, but the men underperformed the... Click for more
Now Is a Good Time for a Project Postmortem

Now Is a Good Time for a Project Postmortem

Improve your financial situation in the New Year by conducting a project postmortem. Reviewing and analyzing a chess game helps you prepare for the next time you play. In general, performing a postmortem on anything can help boost results the next time around. Susan and I just held a postmortem on 2017 and analyzed our most popular Rich As A King posts from the past year. We hope to give you more on the topics that interest you in 2018. Meanwhile, here are links to the top posts for you to review: Blogposts How Basic Chess Tactics Can Help You Make More Money – Find out how chess tactics can be applied both to investing and personal finance, and also to life in general. Does a Budget Tracker Really Help Your Bottom Line? – Learn how a budget tracker really helps you save. Why It’s Important to Know Your Risk Level before You Invest – Just like in chess you don’t want to risk your quality pieces, learn how to mitigate the risk in your investment portfolio. Podcasts How to Use Multiple Attack Strategy to Improve Investment Performance   – Use a “multiple attack strategy” to improve your investment performance AND prowess on the chessboard. Which Is the Best Country to Invest in for Global Diversification? – Global diversification is an important part of investing. Find out about allocating your assets safely and how to decide where to invest. Two Ways Baby Boomers Can Have a Successful Retirement  – Get a strategy for approaching retirement. What topics interest you? Our community boosted these pieces into top positions on our blog. ... Click for more