Ways You Are Costing Yourself Money When You Lie to Yourself About Your Investing Ability
In investing and in life, confidence can be a double-edged sword. Too little breeds hesitation, but too much can make you overestimate your prowess until you start lying to yourself — and eventually others — about your abilities.
A new MoneyLion survey of 998 adults found that the masses think people are more likely to be overconfident in their investing abilities than in just about any other facet of their financial lives. A seasoned wealth planner backs up that assertion and warns that the risks far exceed the likelihood of being perceived as just another stock market blowhard.
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Investing is now almost universally accessible on even the most modest of budgets, and while it can be complicated, it doesn’t have to be. If you’re feeling overly bullish about your underdeveloped skills, you’re probably making things more complicated than they need to be, and a little introspection now could spare you a heap of future financial pain.
People Love To Think They Know How Money Makes Money
When asked which topics people were most likely to pretend to understand but actually don’t, the largest percentages by far said stock investing (55%), cryptocurrency and digital assets (53%), and retirement accounts, such as 401(k)s, IRAs and pensions (37%).
After the top three, there was a steep dropoff to much smaller percentages choosing topics like mortgages, credit scores, taxes, insurance, budgeting and money management.
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Be Extra Vigilant When Things Are Going Well
Josh St. Laurent, founder of Wealth In Yourself and certified financial planner, after more than 13 years of advising 11,000 clients with over $2 billion in assets, knows the danger better than most. In fact, it drove him to change career paths.
“I left a wirehouse specifically because I saw how much damage overconfidence causes, both in advisors and the people they serve,” said St. Laurent.
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In his experience, the lure of self-delusion is almost always most tempting during boom times.
“Investors confuse a bull market with skill,” said St. Laurent. “When everything goes up, people start believing they have an edge. They concentrate positions, trade more frequently, and ignore the base rates.”
‘Overconfidence Tends To Compound on the Way Down’
Misplaced confidence is easy. Long-term consistency is not, and people tend to do what’s easy.
“Discipline beats brilliance over a 20-year horizon,” said St. Laurent.
Warren Buffett famously bet $1 million that the country’s top hedge fund managers couldn’t beat a cheap, simple S&P 500 ETF over 10 years. A decade later, he collected, and if the highest-paid fund managers with proprietary micro-trade algorithms and institutional-grade research and technology can’t beat the market over time, chances are, St. Laurent’s clients can’t, either.
“What I tell my own clients, from first-generation entrepreneurs to professional hockey players, is that the goal isn’t to be the smartest person in the room,” he said. “It’s about designing your life around a plan that removes as many behavioral landmines as possible.”
Like all bad habits, it gets harder to stop lying to yourself about your investing ability the longer you do it, and like the evil version of reinvested dividends, its impact accumulates exponentially over time.
“Then the environment shifts and the losses aren’t just financial,” said St. Laurent. “They’re psychological. Overconfidence tends to compound on the way down.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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