Is There Any Danger To This Tendency Towards Compartmentalization In Our Investing?

We all tend to create “mental accounting” rules about how we will spend and save. These rules can give us round numbers to help make sense of finances, however, over-simplification can be wrong. We talk with Dr. Meir Statman about how this “mental accounting” transfers over to our thoughts on investing, and the dangers of compartmentalization and rigid rules.

In this video podcast designed to bring clarity in the midst of confusion by connecting your great personal finance questions with straightforward answers from industry thought leaders. Today’s question will be answered by Dr. Meir Statman, a consultant to Buckingham and the Glen Klimek Professor of Finance at Santa Clara University, and one of the world’s foremost authorities in the field of behavioral finance, one of my very favorite topics.

Here’s the question we’ll be tackling in this discussion. Dr. Statman, as investors, we tend to fixate on the performance of our investments in a compartmentalized fashion. We look at what the market did today or last week, last month, and especially last year. While these can be helpful to offer us some perspective, I wonder, is there any danger to this tendency towards compartmentalization in our investing?