by Doug Goldstein CFP® | Nov 17, 2014 | Behavior finance, Chess, Financial Strategies |
When starting a game of chess, the first moves are often referred to as “the opening.” Over time, various kinds of chess openings have developed, with their own names, including the Sicilian opening, the Ruy Lopez opening, the Queen’s Gambit, the English opening, the French Defense, and many more. As you develop as a chess player, you will find that certain openings suit your personality and train of thought more than others. And once you have tried some out, you will eventually learn which ones are the best for you. Other kinds of openings may not make any sense to you whatsoever, and even after much practice, maybe you shouldn’t use them. After all, you only get one chance to open your financial game. Find the investing techniques that are best for you Similarly, when running your personal finances, you will eventually discover the methods and techniques that work for your specific personality. Of course, finances and investments are not a game, so you can’t experiment with different techniques in the way that you can with chess. But if you are aware of your strengths and your personality, you will find it a lot easier to research and find the financial methods and techniques that suit you the best. Some people, for example, are very frugal by nature. They are happy to live with the basics and don’t seek much more than that. For them, strict saving and budgeting policies are the most suitable money management tools. But what if you’re a spender? You may find it impossible to keep up with a rigorous saving regime. However, working longer... Click for more
by Doug Goldstein CFP® | Nov 5, 2014 | Behavior finance |
Risk tolerance is a very important factor when playing chess or making financial decisions. Indeed, one of the biggest dilemmas is whether your next move is worth the risk. Very often, fear of loss, or loss aversion, can hold you back from great success. Watch this video with Margie Warrell, executive coach and author of Stop Playing Safe, to find out how to cope with loss aversion and why it’s sometimes very worthwhile taking a... Click for more
by Doug Goldstein CFP® | Oct 15, 2014 | Behavior finance, Decision Making |
When investors decide whether to buy or sell a stock, they often get sucked into the “disposition effect.” Professors Hersh Shefrin and Meir Statman, who first invented this concept in 1985, define it as “investors’ disposition to sell winners too early and ride losers too long.” If you were trying to decide which of two stocks you should sell in order raise some cash, you may decide to sell the most profitable one, and enjoy the fruits of your gains. This decision is a prime example of the disposition effect. Don’t be fooled Many investors don’t realize is that may actually be better to dump the losing stock because you would receive a tax benefit of selling at a loss, and get to keep your better stocks. Why is it easy to fall for the disposition effect? Emotions. The reason is that an investor who bases his financial decisions on the satisfaction that he feels on making a profit from a winning stock is following his emotions rather than logic. Rather than making emotional financial decisions, look at the merits of each individual stock. When assessing whether a stock is profitable, don’t just look at short-term gains, but look at the bigger picture. Could this “winning” stock be an even greater winner if you hold onto it a little longer, or is it time to sell? Remember every financial move that you make is a decision – even if your decision is to to leave everything status quo. Avoid the disposition effect, and make all of your decisions carefully, based on logic and common sense. If you aren’t sure... Click for more
by Doug Goldstein CFP® | Oct 6, 2014 | Behavior finance, Financial Strategies |
One of the best ways to lose a game of chess is getting stuck in a bad position on the chessboard. Logic dictates that if there’s no foreseeable benefit in leaving your chess piece where it is, you should move it somewhere else. Yet for some reason, many people seem to ignore this simple piece of advice, both when playing chess and investing their money. They seem stuck in preserving the status quo as opposed to actively working on making their pieces (both financial and chess) work better for them. Behavioral finance has many explanations for why people stay stuck in the same position rather than progressing. Here’s why: 1. Inertia – You can see that this stock isn’t going anywhere. But as you haven’t made a major loss from it, you figure you may as well leave it be as it doesn’t seem to be doing you any harm. 2. You don’t bother looking at a piece once it’s been deployed – You put some of your savings into a particular holding that you heard about sometime back, so you think no further action is necessary. 3. You don’t want to admit that you made a mistake – Investing in that stock that some of your friends warned you about wasn’t such a great idea, but you aren’t going to sell it because you would then be admitting that you made a mistake. And that’s embarrassing! 4. You actually believe that your piece or investment is well placed, even when it’s not. But what have you based your assumption upon? Have you asked any professional advice? 5. You... Click for more
by Doug Goldstein CFP® | Sep 17, 2014 | Behavior finance, Financial Plan |
The ubiquitous use of debit and credit cards has led today’s consumers to forget about planning and saving. People love to own things, and their Visas or MasterCards have become the ticket for providing them with everything. But at some point, they have to pay for those goods, and they end up paying a lot more. Not only do they pay interest on their credit card debt, but they suffer from a phenomenon known as “credit card premium,” which causes them to spend more when shopping with plastic than with cash. A Dunn & Bradstreet study found that people spend 12%-18% more when using credit cards than when using cash. And McDonald’s found that the average transaction rose from $4.50 to $7 when customers used plastic instead of cash. Use cash instead of plastic By using actual money, you force yourself to plan better and you regularly see the consequences of your spending habits. Unlike a credit card statement that you view once a month, you see the contents of your wallet every time you pull it out. The pain of watching your funds diminish can suffice to keep you on track and curb your impulse spending. And if all of that is not enough to convince you to try paper money instead of credit, studies now show that people who pay cash, not credit, for groceries end up selecting healthier foods. Those who used credit ended up making unplanned, impulse food choices that often included “vice products” like candy, cookies, and sugary drinks, whereas cash spenders were more likely to stick to their shopping lists. Win with tactical... Click for more
by Doug Goldstein CFP® | Sep 15, 2014 | Behavior finance, Chess Strategies |
Here’s a simple investment strategy to beat inflation and protect your retirement nest egg: watch out for false promises. Usually, if something appears too good to be true, it often is too good to be true. The Invisible Chess Attack False promises can be deceiving. Watch out for them both in chess and in investing. In chess, the tactic “the invisible attack,” which is based on making a move that has a dual purpose, can sometimes be misleading. Usually, when people move a chess piece, it’s because they either want to defend one of their other pieces or attack their opponent. However, it’s also possible to launch an attack in an indirect, invisible way. With an invisible attack, your opponent might move a piece that is blocking another piece from attacking. If you are not aware of the whole board, you may have your attention elsewhere, and not notice the purpose behind their seemingly inconsequential move. Sometimes, your opponents may even tempt you by sacrificing their queen. You don’t realize it’s a queen sacrifice until you take it and reveal their background pieces poised to launch a combination attack. The Invisible Investment Attack Investments, too, are not always what they seem. For instance, when you buy Treasury Inflation Protected Securities (TIPS), you may not realize that even though they are linked to the rate of inflation, they also carry an interest rate risk. These investments, backed by the U.S. Government, may rise in value with inflation, but their interest rates remain locked in. This can be devastating if interest rates rise considerably while you own the bonds. Gold has often... Click for more
