Sunday, September 04, 2005

Personal finance, like chess, is a game for thinkers

Who says that is Sunsan Polgar, a four-time women's world chess champion, resident of the United States since 1994. She also states the following reasons and now I understand why my personal finance is not as good as I would like:

1. To win at chess, you cannot make moves without a purpose. You need a plan that often includes short-term or medium-term goals (such as increasing the mobility of your pieces, or controlling a key area of the chessboard). Similarly, in personal finance it makes no sense to make investments at random (such as just because a magazine touted a hot stock or mutual fund) without well-defined short-, intermediate- and long-term goals.

2. Most moves in chess involve trade-offs, and you must consider the good and bad. A move that strengthens your position in one area may create a weakness somewhere else. The same is true with finances. Investments with higher potential returns, for example, typically pose a higher risk of loss and/or offer limited liquidity.

3. In chess, you generally can't win by attacking with just one piece. With investments, you need different asset classes working together in a diversified portfolio, not just one type of asset (as investors who piled into technology stocks discovered in 2000).

4. In chess, you must defend as well as attack - your opponent is trying to checkmate you, too. In financial planning, you must have your defenses in order, including an emergency reserve and adequate insurance, before you invest.

Read the complete article here.



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