International Business & Economy How investing is like playing a game of chess

How investing is like playing a game of chess

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Jane Davies, manager, HSBC Global Strategy Portfolios, explains how overcoming behavioural biases is key to long-term success in investing.

At a chess board, each piece has a role to play, each move is calculated looking many moves into the future, and the player is balancing a measured attack with a solid defence.

In a many regards, playing a game of chess is analogous to the world of multi-asset investing.

In Asia, multi-asset investment hasn’t always gained wide acceptance by investors across the region as many investors show a strong home bias and stock-centric approach – but by reexamining our behaviour and thinking more strategically many of us might benefit from an approach that properly applied can help us match our risk exposure to our risk appetites at different stages of life.

Whilst the chess master has his Queen, his Bishops, and his Knights ready to attack, we in the multi-asset world are positioning our risky assets; the chess master has his pawns, or his rook castled to defend his king, we deploy bonds from around the world; finally, we need to protect our king… cash.

That said, when it comes to investments, we should always remember that their value and any investment income can go down as well as up and investors may not get back the amount originally invested.

Both positioning and value are important.

Whilst, the absolute value of a piece is important, equally, its relative value is based on its potential moves, its current position and its perceived value to another player.

The best players occasionally make bold moves, but winning strategies are always rooted in a robust decision-making framework, the foundations of which must be built before making any moves at all.

Emanuel Lasker, the German World Chess Champion for 27 years, mathematician and philosopher said, ‘on the chessboard, lies, and hypocrisy does not last long.’

As in chess, overcoming behavioural biases is key to long-term success in investing. Shortcuts, hubris, and self-deception never work.

Both the chess master and the multi-asset portfolio manager must be cognizant of common pitfalls and avoid anchoring, framing, and hindsight bias.

You need a broad view of the game

To play chess, you need to know what each of your pieces can do on the board and how to assess their value at any point of time.

In multi-asset terms, this is translated into defining the underlying investment universe.

After that, the aim is to combine different asset classes into an efficient, well-diversified investment portfolio, where each of the pieces is well positioned to react to an opponent’s possible moves.

You need a strategy 

Chess players and multi-asset investors alike know that strategy is key. The ultimate objective is to be a step ahead of your opponent.

Rather than relying on past performance and hoping that history will repeat itself, a portfolio manager needs to build their strategy based on forward-looking expectations of risk, return, and covariance between asset classes.

This forward-looking approach to portfolio construction is what differentiates robust asset allocation from a traditional ‘set and forget’ approach.

You need to be responsive to your opponent

Shorter term tactics are key to the game. As in chess, the landscape can shift dramatically in a few small moves.

The chess master must have the flexibility to be nimble and both capitalise on opportunities and defend against loss.

A good portfolio manager should be dynamic enough to respond to shifting macroeconomic conditions, market sentiment and momentum.

You don’t need to sacrifice a pawn without a good reason

Once you define your strategy and asset allocation, they will need to be implemented.

According to academics – and our own experience – more than 90 percent of the variability of a portfolio’s return can be explained by asset allocation.

That is why it is so important to get asset allocation right, arguably more so than trying to add value by outperforming in each asset class. We believe that cost efficiency is paramount and this can mean that passive vehicles or direct holdings may be the best way to fulfil asset allocation decisions.

You need to keep your king safe

Managing risk is as important as managing performance. Multi-asset solutions need to stay aligned with their client’s target risk profiles.

As part of a dynamic approach to portfolio management, this is achieved through ongoing risk management and detailed portfolio analytics.


Unlike the chess master, for a multi-asset investor, the game is not over at checkmate; for us the board continually resets.

As in chess, there is no magic bullet and even the best players cannot win every game.

By remaining humble, continuing to learn, adopting a rigorous, dynamic and forward-looking approach, we can keep the board continually tilted in our favour.

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