Overconfidence in Investing

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Jonathan Clements was a longtime personal finance columnist for The Wall Street Journal, and he offers great advice at the best price you can get (free) on his blog Humble Dollar. Here is one piece of advice from his site:

OVERCONFIDENCE. Most of us believe we’re above-average drivers, smarter than most and better looking. This overconfidence is often a good thing—it can boost happiness and help us in our career—but it’s terrible for investment results. As they seek market-beating gains, overconfident investors trade too much, take unnecessary risk and buy costly investments.”

I’m smarter than most but probably an average driver. When it comes to my looks, my crowning achievement is that I was once told by a patient that I was “extremely handsome.” A few minutes later she told me that one of her medical problems was that she was legally blind. You can’t make this stuff up…

If there was a common fault among military members, overconfidence is probably it. It has boosted my happiness and helped me in my career, but it has caused me to take unnecessary risk. I don’t think I trade too much because I never sell anything. I simply rebalance to my desired asset allocation with my end-of-the-month investments.

Avoiding the pitfalls associated with overconfidence is one of the reasons I use a financial advisor despite my obvious interest in personal finance. While I execute the financial plan myself and don’t pay any ongoing fees to a financial advisor, getting the plan from Vanguard’s Certified Financial Planners was eye opening. While I had a 100% stock portfolio, they recommended an 80% stock and 20% bond portfolio with a gradual transition to 60% stock and 40% bond when I retire in 5-11 years, depending on how long I stay in the Navy.

Probably more than 90% of my readers could benefit from a financial second opinion from a trusted advisor. If it was me, I’d get that opinion from Vanguard.

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