This past year I’ve been watching a new sport that I have never invested much time in before: international soccer. I took a break from football, basketball and jumped over the pond to enjoy a fresh taste of a different sport. I mainly watched the Premier League (England’s top-flight club football division) since NBC broadcasts the games and they are relatively easy to find. I even found a favorite team to root for: Leeds United. 

In the summer when the club season is over, international play heats up. They played the Euro Cup 2020 this year in June and July since it was postponed due to the coronavirus. 

We are all somewhat familiar with the World Cup, which is played every 4 years at a host nation where the entire world’s countries compete to be crowned champion. In between the World Cup, the continents of the world compete amongst themselves. In South America, you have the Copa America – with teams like Argentina, Brazil, and Columbia. North & Central America has the Gold Cup with teams like the U.S., Mexico, Canada, Costa Rica, and Caribbean nations. And in Europe you have the Euro Cup with teams like England, France, Germany, Belgium, Italy, Croatia, Denmark, Sweden, etc.

The Euro Cup is considered one of the best international tournaments due to the high quality of players who are from Europe playing for their home countries. The tournament this year was outstanding and did not disappoint. Something like 9 games went into overtime and were decided by penalty kicks, one of the most nerve-wracking moments in sports. 

The final between England and Italy was no different. It came down to the last kick and the Italian goalie made a brilliant save giving Italy the championship and left English players and fans in a state of distraught. I was rooting for England and my heart hurt to see that young player miss and the devastation on his face. It made me wonder why I felt this way and of course, what this may have to do with investing (I’m a hit at parties).

If I had looked up the highlights on YouTube the following morning or just seen the score – I would’ve simply thought, “Wow, it looked like a great game!” And then probably went back to my day without a second moment of reflection. But I couldn’t deny that I felt really bad after the game was over (don’t worry I’ve completely recovered now) even though I have no personal connection with any sort of player, let alone played soccer in 20 years!

Endowment Effect

In psychology and behavioral economics, there’s this very well researched emotional bias that happens to people called the Endowment Effect as coined by Richard Thaler. People will overvalue something that we own, regardless of its objective market value. For example, you might have a garage full of stuff that you’ve collected over the years. You hold onto it because it’s yours not because your 3rd grade baseball mitt that has come apart has any marketable value.

The reason that I felt bad after the soccer game was because I had just spent 90 minutes plus 30 minutes of overtime watching it! I couldn’t just let it go because watching the game cost me something and I was hearing all about the players and their backstories! I was emotionally invested in the outcome even though it was just a game and wouldn’t have thought twice about it if I had just seen the score outcome.

We do this with our investments, too. We value assets that we already own more than a similar security we do not own.  

Maybe our grandfather worked at General Electric, so we have always kept GE stock in our portfolios, or maybe we inherited some real estate and would never sell it no matter how high (or low) in value it reached. Or it could be just as simple as we’ve come up with an investment strategy on our own time and even if research shows there might be better strategies, we hang with ours.

We stick with assets or strategies because of familiarity and comfort. 

Thankfully, becoming emotionally invested in a soccer game doesn’t have much of a downside besides my toddler kids thinking I’m weird when dad is jumping out of his seat when goals are scored. But with our investments, it could have a bigger impact. We may not be as diversified as we should be or our portfolio’s allocation isn’t appropriate for us due to that large holding. 

If you think this may not be an issue with your circumstance, ask yourself these questions instead: 

• What are the positions I would never change? 
• Do I hold my securities loosely or is my ego wrapped up in my positions?

Now I’m not saying that you should change everything you own just because you read something – that would be anti-long-term investor, but when an advisor or some thoughtful research pushes back on your viewpoints do you want to grab and hold or are you open to learning more?

Take a good hard look at your portfolio and ask yourself these questions.

If changes do need to be made, consider moving toward an acceptable asset allocation by a small series of unfamiliar purchases rather than all in one go.