Seeing as this is an investing site then surely there are many readers out there who have made both good and bad investments. That part is pretty much guaranteed regardless of one’s expertise. You can’t escape loss but there is a way to manage is and that is by reducing your investing mistakes. There are many mistakes one could possibly make but today, we are going to focus on just one.
Did you know there is a niche within the study of psychology called “behavioral finance?” Well, it’s true. Essentially, this sector of psychology studies the brain and how it reacts ot certain financial situations. It’s beneficial for investors since it allows you to “open the hood” so to speak and see how the inner works of the mind operate, allowing you to understand the basis behind your own decisions. Now, let’s get back to the topic of overconfidence.
Simply put, overconfidence disables your ability to see reality. Imagine you have a big piano recital coming up. Talentwise, you’re good. Your parents have told you so and even a few friends have shared your piano videos on Instagram. You got a few likes from it. The confidence goes to your head and then, you decide you don’t really need to practice for this recital because you are already amazing. Well, the time finally comes and it turns out your confidence was much higher than your actual skill. You end up making many mistakes resulting in minimal applause from the audience.
Now, let’s apply this same logic to investing.
Your gut isn’t always right. Sometimes it is but that doesn’t mean you should trust it all the time. If you do, then you will get a crash course on market volatility the hard way. Do not put all your fait in one stock or one fund. Do not put too much confidence in one person or one company. The name of the game is calculated confidence. Have you actually calculated how much money you need for retirement?
Don’t just be confident that $500 a month will turn into 1 million by the time you retire. That is overconfidence and it will cost you. Take a few minutes to calculate what you’ll need to invest every month to get the return and stick to it. Don’t let overconfidence drive your investment decisions.
The most obvious tool to help you reduce your investing mistakes is a calculator. That’s right, the good old fashioned calculator can help you mathematically plan your financial future so you have just the right amount of confidence.
Another great tool is a strategy of some sort. Yes, you need a plan. What percentage of your fund should be used for safe, stable investments, and what percentage is allocated towards risker investments? This is called the Barbell Strategy and it’s worth a read if you’re interested.
Just remember, stay positive but don’t let that positive transform into overconfidence.