We all know that investing is essential to long-term wealth creation, as it can be a very rewarding and potentially lucrative venture. But I was surprised when I was presenting to a large audience of entrepreneurs last week that while some were under confident, many others were overconfident, which makes me wonder which is better.
Being under confident means the investor is more conservative in their approach, as they prefer to invest in assets that are deemed safe. While those who are overconfident tend to take risks and often fall victim to the illusion of control, as they believe their knowledge, experience or gut feelings can predict the market, which is often not the case.
They also tend to overestimate their abilities and underestimate the complexity of their investment decisions. All too often, they assume that past successes are based solely on their skills rather than a combination of factors, which usually includes luck and/or favourable market conditions like many who invested in the Bitcoin boom.
Overconfidence also leads many not to do the required research and analysis. Instead, they rely on rumours or tips from all manner of unreliable sources. The challenge with this is that they falsely assume that their gut feeling is infallible, which often leads to poor investment decisions.
They also fail to adapt and learn from their past mistakes even when they are presented with solid facts, which is something I observed last week. Their unwillingness to adapt is because they fail to acknowledge when they are wrong or when market conditions have changed and prefer to dig in their heels, and fold their arms in stubborn defiance.
Approach with a balanced mindset
When it comes to investing, particularly in the stock market, it is crucial that you approach it with a balanced mindset combined with a dose of caution.
Overconfidence is a lot more dangerous than under confidence as it tends to undermine sound decision-making and exposes you to unnecessary risks and potential losses.
Recognising when you are reacting from an overconfident mindset is not easy, as it requires self-awareness, humility, a commitment to gain the right knowledge and to take a disciplined approach to investing. This also applies to those who are under confident, as investors who are self-aware can mitigate any negative effects and increase their chances of achieving long-term financial success.
A good way to become self-aware is to ask yourself if you would give all of your money to someone to invest it with your knowledge, skill and experience. If the answer is no, then you are well on your way to becoming a better investor.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online at www.wealthwithin.com.au