Avoiding Overconfidence in Investing: a Key to Long-term Success
While there are some instances where having excess confidence is helpful (like in a job interview), it can often prove harmful. For example, numerous studies have been developed on the confidence of drivers – and around 80-90 percent of them wind up rating themselves better than average when it comes to their driving skills. This is known in psychology as the overconfidence effect.
This false sense of overconfidence can also be dangerous in investing – an investor might become overconfident in their ability to predict the future results of their investments, and then become sorely disappointed as a result. That’s why avoiding overconfidence in investing is one the keys to long-term investment success.
Why is avoiding overconfidence in investing so important?
When an investor is overconfident, he/she might end up throwing their investment strategy out the window by concentrating much of their wealth into one investment. For example, after seeing three straight years of double-digit returns, it would be easy for an investor to become overconfident in emerging market stocks in 2008. However, an investor who changed their strategy based on this false sense of confidence would be severely disappointed when emerging market stocks lost more than half their value in 2008.
How can you start avoiding overconfidence in investing?
The truth is that it’s impossible to predict with certainty which way the stock market will go in the short-term. By sticking to a long-term perspective, you can ignore the temptation to predict short-term outcomes. Utilizing a diverse portfolio to focus on growing your wealth for long-term can alleviate the temptation to make risky forecasts.
Need help avoiding overconfidence in investing?
At LexION Capital, our investment decisions are firmly grounded in a long-term perspective that’s backed by decades of experience and Nobel-prize winning research. We frequently help our clients avoid the temptation to become overconfident in investing by crafting a unique investment portfolio to reach their long-term goals and needs. If you want to learn more about our services and how we can help you with avoiding overconfidence in investing, don’t hesitate to contact our fiduciary advisors today.