Pete the Planner: Confidence is critical for investors

How confident are you in what you are doing financially? And does your level of confidence affect your behavior and your action?

Confidence has increasingly come into focus for investors as an intangible concept that has significant tangible consequences. Confidence can affect everything from risk tolerance, to diversification, to the basic funding of an investment.

A lack of confidence can lead to paralysis, while overconfidence can lead to a wanton disregard of risks and common investing maxims. Your goal as an investor is to evaluate your confidence level and to measure its impact on your decision-making.

No matter the subject, possessing overconfidence when it’s not warranted can create unfortunate results. An overconfident scuba diver is a perfect example of this. If a scuba diver is overconfident, he might take too many risks and put himself in compromising situations. Novice scuba divers must have realistic trust in their skills and not let their sense of adventure override practical thought. On the flip side, a lack of confidence in quality training can lead to danger and a less-than-ideal diving experience.

Common overconfidence mistakes

Mistakes driven by overconfidence can come in many forms. One of the more common mistakes is overconfidence in a company’s brand and position within its industry. For instance, if you happen to be a loyal user of a particular consumer good or service, your knowledge of the company shouldn’t be mistaken for a positive investment evaluation.

“I like their pants. I buy their pants. Their pants must be a very good investment.” The pants company may or may not be a good investment. You may be a good judge of trends and a company’s popularity, but the financials of a company may tell a different story.

It’s also possible to be overconfident in a person or news organization that paints a particular investment as good or bad. Having too much confidence in someone who’s wrong is just as bad as having too much confidence in your own wrong ideas.

Additionally, it’s not uncommon for investors to transfer confidence they might have in other areas of their life to their investment decisions.

“I have a good job. I earn a nice living. I make good lifestyle and career decisions. Therefore, I’ll naturally make good investment decisions.” Unfortunately, investing doesn’t work that way.

Common mistakes driven by a lack of confidence

If people lack confidence, they are more likely to choose inaction. Inaction can come in the form of not saving money, not investing money or even refusing to log in to an online investment account to evaluate performance. An investor’s lack of confidence also can lead to bailing out of the market on a whim, or turning over a portfolio constantly with new, hopeful, yet unfounded investment ideas.

Does gender matter?

Several studies note that women, across the board, have less financial confidence than men. A 2013 Prudential study found that 37 percent of men rated themselves very well prepared to make financial decisions, while just 22 percent of women self-evaluated themselves as very confident.

This self-doubt among women has led to lower investment returns as women transfer their lack of confidence into less risk. In fact, in a newly released Pershing study, researchers found that the relative lack of investor confidence among women can cause them to take fewer investment risks. And the lack of risk-taking is having a significant impact on these women reaching their retirement goals.

Men are certainly subject to the same confidence issues and their consequences but on a smaller scale than female investors.

Improving your confidence

It’s very important to be confident in your investment decisions. The proper amount of confidence can bring accountability to your goals and resolve to your strategy.

One of the best ways to improve confidence is through education. Familiarizing yourself with investment terms, concepts and trends can help you comprehend and analyze investment opportunities you might face.

Taking time to read your investment statements, reading fund information and prospectus, and keeping current with this column are great ways to boost confidence. By fully comprehending how your investments work, you’ll be less likely to suffer the ills of overconfidence and a lack confidence.

Have a question for Pete the Planner? Email him at pete@petetheplanner.com or visit www.petetheplanner.com.

Pete the Planner

Tune in to Pete the Planner, who is also Fox 59’s personal finance expert, at 8:15 a.m. Wednesdays.