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 don’t want to spend too much time on rethinking your positions. Life is just too busy, so you’d rather let your investments or chess pieces take care of themselves. Hopefully, you’ll win the game anyway.
6. You have more important things to do. You know that you should find a better place for your retirement money than your bank account, but compared to all the other stuff you’ve got to do, this is going to stay on the bottom of your to-do list.
If you don’t have time to get it right the first time, when will you have time to fix it?
You can easily avoid these stopping points if you make sure to review your investments on a regular basis. Do a monthly check to see if your asset allocation in your portfolio is balanced. You should make a more detailed quarterly review, and once a year you should sit down with your financial advisor and update your financial plan in accordance with your ever-changing life circumstances.
You may think that you’re too busy to find the time to do these reviews, but in the words of Benjamin Franklin, “Time is money.” Invest some of your time now to take care of your money.
To read more about why investors lose money and what you can do about it, click here.
