Broker Check

When it Comes to Investing, Better to Be Humble Than Overconfident

by Howard Hook, CFP®, CPA

As published on Wayne.Patch.com, September 3, 2013

A major trap which ensnares many investors is overconfidence in their ability to predict the near-term future of the financial markets. This typically occurs when, for example, a particular market is experiencing strong movements in one direction or the other. While confidence in one’s abilities often leads to success in other areas of endeavor, it usually is just the opposite when investing.

The best example of this is the expectation of rising interest rates. Practically from the moment the stock market bottomed out on March 9, 2009 and began to steadily rise, investors have been concerned with rising interest rates. On that day, the yield on the 10-year treasury was 2.89 percent. On August 23, 2013, the yield on the 10-year treasury was 2.82 percent, not much of a difference. Investors who moved out of bonds and into cash lost out on positive returns in the bond market from 2009 through today.

Another example was when Standard & Poor’s lowered the credit rating of the United States from AAA to AA+ on August 5, 2011. At the time, it was clear to many investors that the U.S. would fall back into a recession since treasury rates would rise, causing credit card and mortgage rates to rise, as well as interest rates on new municipal bond offerings. Once again, this did not happen. As of August 23, 2013, the S&P 500 was up 38.5 percent as measured from August 4, 2011 until August 23, 2013. Mortgage rates today are about where they were in August 2011 and the 10-year treasury rates are only a fraction of one percent higher today than they were back in August 2011.

These are just two examples of how overconfidence hurt investors who moved away from stocks and bonds. In fact, many investors exhibit this overconfidence all the time. All investors who think they can time the market are overconfident with their thinking. Thinking they know something others do not causes them to often buy or sell at the wrong time. Study after study has shown that trying to time the market is not a good strategy, yet overconfident investors still think they will be the ones who can succeed.

Investors need to practice humble investing. Humble investing means recognizing they cannot predict whether their investments will go up or down. Humble investing means accepting that “outperforming a neighbor’s investments” is not an appropriate investment goal. Humble investing means acknowledging that sticking with a diversified asset allocated investment strategy through the ups and downs of the stock market will produce superior results over the long term.

Practicing humble investing may not get you invited to appear on CNBC’s “Power Lunch,” but at the end of the day, it will put you on a better road to achieving your goals and objectives.