Why Following Market Trends Can Make You Lose Money

Why Following Market Trends Can Make You Lose Money

Some people treat market trends like any other kind of fashion. Just as many people dress in a certain style because it’s popular, some investors choose a particular type of investment or react in a particular way to the markets because “everybody’s doing it.” But is that wise? Don’t follow the crowd Imagine taking this approach when playing a game of chess. Instead of thinking whether your strategy is of any real benefit to your particular situation and if it’s actually helping you win, you blindly follow a specific approach simply because you read about it on a couple of chess blogs. Without questioning it, how do you know if it’s a good strategy for you? In fact, when Susan Polgar and I wrote Rich As A King, she said a common problem she sees with amateur players is that they often memorize openings of world champions, but then get stuck because they don’t really know what to do once the board develops into the mid-game. While a particular strategy may be popular because it really is effective, that doesn’t automatically mean that it’s right for you every time. You need to look at what’s happening on the chessboard, what your opponent is doing, and then determine which strategy can help you win in your specific situation. Blindly following a strategy just because it sometimes works or because it worked for someone else, without stopping to think about its actual effectiveness in your particular situation, can be a huge mistake. As Ralph Charell wrote, “Avoid the crowd. Do your own thinking independently. Be the chess player, not the chess... Click for more
How Larger Mortgage Payments Can Help You Save Money (Ironic, Isn’t It?)

How Larger Mortgage Payments Can Help You Save Money (Ironic, Isn’t It?)

One very effective, but often overlooked way of saving money is increasing your monthly mortgage payments. The idea of spending money in order to save sounds like a contradiction, but if you look at your bigger financial picture it makes a lot of sense. Here’s why: Remove all obstacles in your path When you play chess, your main objective is to checkmate your opponent. To achieve your goal, you need to find strategies and tactics for removing those obstacles so that you can move forward. Occasionally you might even have to sacrifice a valuable piece to get ahead. In the short term, sacrificing a piece may not seem advantageous, but in the long term a sacrifice may help you win the game. Similarly, in personal finance, you need to eliminate the debts blocking your path towards a comfortable retirement. These debts include credit card balances, bank overdrafts, and also your mortgage. By making larger monthly payments, you can pay off your mortgage more quickly. You actually end up spending more money over the long term if your monthly payments are smaller and the mortgage is spread out over a longer duration. But why is this, if you are borrowing a specific sum of money in both cases? The answer lies in the way that a mortgage is usually built. How does a mortgage work? A mortgage is a loan you pay to the bank with your house as collateral. In America, mortgages usually vary from 10 years to as long as 50 years. The debt that you pay back consists of the principal, or the actual sum that you... Click for more
How Basic Chess Tactics Can Help You Make More Money

How Basic Chess Tactics Can Help You Make More Money

Applying basic chess tactics to running your finances can help you become a better investor. How? Here are some examples: Look at the whole board One of Grandmaster Susan Polgar’s most important lessons when coaching chess is to “look at the whole board.” In both chess and investing, you need to base your decisions not only on your current situation but also on the big picture. While the squares directly in front of you may seem to be totally clear from any danger, other squares that are slightly further away may be more perilous for you. Similarly, when you make investment decisions, look at the long term as well as at your current situation. Take small steps to success Very often, a game of chess is won through taking small steps rather than through sweeping, dramatic moves. A good strategy is to build up both your attack and defense gradually, accumulating small advantages along the way. Similarly, as an investor, you need to take small steps, such as putting away regular savings and contributing to retirement accounts. When you take small steps to increase savings, you let the magic of compound interest and time work to your advantage. Review your strategy Chess players continually review the tactics and strategies they employ on the board in order to improve their game. In the same way, you should review your finances on a regular basis. Life, like the chessboard, is always in motion, so make sure that your financial plan continues to be relevant for your personal situation. By making regular financial reviews, you’ll have a better grasp as to when... Click for more
Why It’s Important to Know Your Risk Level before You Invest

Why It’s Important to Know Your Risk Level before You Invest

Understanding your risk level is one of the most important parts of financial planning. Here’s why: Imagine you’re playing chess and you’re about to move your queen to a particular square. Making this specific move may put pressure on your opponent’s king, but when you look at the entire board (the big picture view), you see that you might also lose your queen in the process. Is your possible gain worth the risk of losing your most important piece? You need to evaluate the risk-reward ratio of your move… both in chess and in investing. Risk of loss vs. possible gain Generally in the finance world, the riskier the product, the greater its potential for gain – and loss. Every investor needs to balance the odds of losing money against the possibility of a profitable outcome. Ask yourself: What would I do if one of my investments dropped 20% in value? Would I be able to continue meeting my financial goals? Would I sell and lock in the losses or do I have the time before I actually need to use the money, such as when I retire, to hold the position (or another) and try to recoup the losses? It helps to avoid euphemisms. “Risk” is simply a more acceptable way of saying, “you might lose money.” Among financial analysts, common synonyms for the word “lose money” are “market correction” or “adjustment.” These expressions can make losing money sound more palatable.  However, when you want to understand your own risk level, don’t ask yourself if you could survive a 20% drop in your account. Try using more specific... Click for more
How to Protect Your Money from a Market Crash

How to Protect Your Money from a Market Crash

Market crashes are inevitable. Just as they happened in the past, they are also likely to occur again in the future. So what should you do to protect yourself from a volatile market? Chess strategy can help you deal with volatile markets The following anecdote, from the world of chess, provides an insight on how to deal with a bad situation (like a market crash) when it occurs: In November 1986, the World Chess Federation (FIDE) decided to intervene in the chess rating system. In an unprecedented event, they granted all woman chess players 100 extra bonus points – except for Susan Polgar. They claimed that since she competed mainly against men, she did not need the extra points. Besides the unfairness and humiliation that it caused, FIDE’s decision hurt Susan’s ranking and she was displaced from the top of the list of world-class chess players. But instead of giving up, Susan continued to work hard to regain her top position. She earned her Grandmaster title and became the world champion. Susan’s sudden and unexpected loss of her rating could be compared to a stock market crash, which can also be unpredictable and sudden. If your stock portfolio takes a dive, it is important to hold onto your stocks if the fundamentals are still sound. The moral of both Susan’s story and how to react to a downward trend in the market is the same: bad things will happen, but if you give into despair it will be difficult to get back on course again. Is there anything you can do before the market crashes? While moving on and... Click for more