Having the confidence to invest and follow through on your investments is essential to being successful in the markets. Failing to do so will create a lot of problems, as you constantly doubt your investment decisions and adjust your portfolio constantly.
However, investor confidence is a complex subject that requires us to deeply understand human behavior. You cannot expect to start investing and understanding stocks overnight. It takes time, and as you build your knowledge base your investor confidence level rises.
The lack of confidence when investing is one of the leading causes of losses in the market. An investor that does not know what is doing, is much more likely to panic, and sell and buy without any fundamental reasoning. Let’s explore the importance of being confident in your investments.
Importance of investing confidence
Having the right confidence level when investing is crucial to your success. As an investor, you need to remain humble, even if you just had an amazing year with spectacular returns. Not letting your emotions affect you, start by keeping your investor confidence level in check.
You don’t want to be overconfident, since this might lead you to think you are a stock market genius, and everything you touch turns to gold. Short-term gains for inexperienced investors can create a feeling of overconfidence that should be avoided.
It can be dangerous to be overly confident because it can lead you to think you can take more risks.
In the same way, you want to avoid investing without being completely confident of what you are doing. Most likely what will happen is that a small market decline could make you panic, and sell everything as fast as you can.
What can cause a lack of investor confidence?
Here are the main reasons investors lack confidence:
- Lack of knowledge
- Not doing their due diligence
- Not having a strategy
- Short-term thinking
- Not being diversified
- Developing wrong investment beliefs
- Feeling overwhelmed
Lack of knowledge
One of the main reasons for lack of investor confidence is not knowing what you are doing. If you have just started investing recently, you do not have the confidence to hold your stocks. It can lead you to easily panic during a downturn.
Not doing their due diligence
Another reason that causes a lack of confidence when investing, happens because you did not research the company properly. Not doing your own due diligence is often one of the ways of losing money in the market.
Additionally, if you invest in a stock that you did not research if the stock declines you might panic and sell at a loss. As Peter Lynch said, you need to know what you own.
Not having a strategy
Another common reason why investors lack confidence when investing is that they do not have a strategy. This makes them question their investments and what they are actually doing.
Before even starting buying stocks, you should define a strategy that you are going to follow. Make sure you keep an investing journal with you, so you can write down each trade. Compare it with your strategy, and determine what needs to be adjusted.
Along with not developing the right strategy, many investors also tend to have a very short investment horizon, and this can also affect investor confidence.
Stocks prices tend to fluctuate in the short term, and if a stock you just bought declines for no apparent reason, it might affect your investing confidence.
Not being diversified
It is also important to be diversified, especially if you are not a seasoned investor. Although there are some reasons that make sense for investors to have a concentrated portfolio, this should only be done if you know what you are doing.
Developing wrong investment beliefs
Investments are extremely connected with human behavior and emotions. This is exceptionally true in the short term. As Benjamin Graham put it:
Letting your emotions affect your investments can make you develop wrong investing beliefs.
You may find that due to past experiences you develop investing beliefs that affect your investing confidence, and that should not be followed. It can be easily reflected in how you invest or pick companies, and how you manage your portfolio.
These beliefs can have a tendency to make you superstitious and can dampen your investor confidence
It is nearly impossible to invest without being influenced by your past experiences. However, it is important that you understand exactly what went wrong, with some of the investment mistakes you have made in the past. By doing so, you can learn from them, and incorporate those lessons into your strategy.
This is one of the reasons why investing can be so challenging and rewarding. You need to question your pre-established beliefs.
There are thousands of stocks, metrics, and things to analyze, and this may be overwhelming at times. One of the consequences is that it can have a terrible impact on your investing confidence.
Since every stock is different, every research is also different. You need to be able to understand that it can sometimes be overwhelming because you need to constantly adapt.
When investors reach this point they start feeling overwhelmed with the number of choices, and usually lose focus. With so many stocks and indexes to choose from, they don’t even know where to start with.
The answer is to start with what you know. Let’s say you work as a car salesman, you might have some insights into what car brand or model is currently the best selling.
You will also have a sense of how many cars are being sold, or if the demand for cars is high or low. Therefore, you should focus on the knowledge you already have. It is easier for a car salesman to analyze a car manufacturer than it is for someone that has not worked in the industry at all.
How to improve your investor confidence
Here are a few points you should follow in order to improve your confidence while investing:
To be successful as an investor you need to be able to question your strongest beliefs. Part of being successful in the market is to always question your pre-established ideas, which may hinder your investment strategy.
You need to adapt to constantly changing market conditions, and improve your decisions as you go along. Doing so will allow you to be one step ahead of yourself.
You would be surprised how incredibly common it is for investors to self sabotage themselves based on absurd beliefs. If you are not willing to do that, investing will become an extremely hard and painful task, because it will always be difficult to understand your mistakes.
Let’s say you analyzed a company, and you feel the stock is undervalued and you should invest in it. Ask yourself how can I be wrong.
By putting things in perspective, you will get a better sense of the decision you are about to take. Scrutinizing your analysis and decision can be painful but it is ultimately very rewarding.
When you take one side of a trade, always ask yourself what could the other side be thinking. What are their motivations to do the exact opposite of what I am doing?
Investors often rely too much on their portfolio performance to analyze how they are doing, especially over the short term.
Your performance should not dictate your investing confidence. The reality is that portfolio underperformance can happen for different reasons, and there are ways to deal with it.
Even if you are underperforming the broader market, it does mean that your investment thesis is flawed. This can lead you to question your decisions and your whole strategy, when in fact it's just regular price fluctuations.
You might even feel compelled to change your strategy based on the short-term performance of your portfolio. Short-term performance should not be considered the most important factor when it comes to judging decisions.
We have seen how important it is for investors to properly manage their investment confidence. You do not want to be overly confident or lack enough confidence to stick with your strategy, and your decisions.
Scrutinize not only your beliefs but also your decisions and visions will ensure that your confidence grows over time.
You should examine every little mistake or success. This will allow you to learn with all the decisions you make, and it is a common practice even for the most successful investors.
Featured image source: Talentculture