When you learn how to play chess or invest, you’ll soon find that every move you make must have a purpose. In the book, The Winning Investment Habits of Warren Buffet and George Soros, readers pick up a great piece of George Soros advice: He says that if you’re having fun while investing, you’re probably not making serious money because good investing is boring. Some people know what they’re doing, and they make sure that every move they make brings them one step closer to achieving their income goal.
Others – unfamiliar with the rules of sound investing – fail to develop and execute a wealth-building strategy. Worse still, they sometimes do things that appear random simply because they have no idea what they are doing. Think of the chess players you know. Some play by simply moving pieces around on the board, and others play with a set strategy and a list of tactics to implement. Different personalities err for a variety of reasons. Daniel Kahneman, the Nobel Prize winning economist, once pointed out that many people who invest for themselves end up losing money simply because they are overconfident. Since they want to appear like shrewd traders, they often buy or sell some stock just to look good.
This action fools them into believing in their own aptitude. Ultimately, though, they lose money because their moves often have no real purpose. Expanding on this idea a little, here is a simple strategy I want to leave you with:
- First, look at your three biggest positions, no matter what they are (even cash or money market funds count here).
- Second, don’t waste time on small positions.
- Third, consider any big position important, whether it is mutual funds, real estate, or stocks.
- Fourth, see if you have an overconcentration in any one investment. Mutual funds often limit their exposure on purchase to 2% to 3% of their portfolio. What do you do in your portfolio?
Conclusion Make every investment count by really understanding what you’re doing. Think through your moves rather than thinking how a move makes you feel. Follow a set strategy and your portfolio might mirror a winning chess game.
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