Don't let mental accounting ruin your financial planning strategy. You need to see the complete picture.
Look carefully at your financial behavior and be careful not to miss any important aspects of the money picture.
Imagine if someone summarized your whole financial picture on one page. The report would have each of your holdings, and would also show you their relative strengths. On top of that, it would catalog every possible vulnerability for you in an easy-to-read fashion. With all that information at your fingertips, would you be able to make the right investment decisions? Unfortunately, the answer is probably “no.”
Mental accounting is the tendency to look at one account at a time, rather than focusing on all of them as a larger unit. A wealthy investor might have once dabbled in shares, buying a small lot just for fun, and he still owns the position years later. Rather than just getting rid of the shares, or transferring them over to the account which is traded by the professional money management firm, he constantly follows this one stock. He reads the news, looks at the financial statistics, and examines the company’s trading patterns. He would be a classic case of someone engaging in mental accounting, overemphasizing one part of his wealth instead of looking at the big picture.
“My Family, Inc”
To avoid this problem, view yourself as the Chief Executive Officer of your own company, “My Family, Inc.” You have different divisions, each of which has certain responsibilities. The checkbook division handles the payroll and invoices that your company receives. You have tasked the bond unit with supplying regular income to cover all your monthly expenses. And the stock department must seek out new opportunities to help you grow the bottom line. Since you’re the CEO, you assemble the team leaders on a periodic basis and have them report to you. Each category will then get the attention it deserves. They may not need equal consideration, but having your divisions all in front of you can help you decide which part of your portfolio deserves your attention.
Looking at each stock by itself is like looking at an impressionistic painting by reviewing the dots one by one. Instead of examining each point by itself, take a step back and look at your entire financial snapshot. If you focus on the big picture, you and your portfolio are more likely to come out a winner.
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.