Are people overconfident?
Studies published over the years demonstrate that people overestimate their abilities and potential for reaching their goals. Julie Andrews illustrated this 55 years ago when she sang “I have confidence.” The ironic point the song makes is that her (over)confidence is misplaced. She had very little reason to expect everything to “turn out fine” given the circumstances she was facing.
It’s easy to see how people are overconfident today. Just ask a room full of people to raise their hands if their driving is above average. About 90% of people raise their hands. Of course, it’s mathematically impossible for 90% of people to be above average. We don’t live in Lake Wobegon.
Our overconfidence affects us financially as well. People under-save and over-consume, figuring everything will turn out fine. Some people over-trade their investment portfolios, chasing hot ideas and suffering when these fail to live up to the hype. But more common is intense inactivity. An analysis of 1.2 million 401(k) investors revealed that over 80% of investors did nothing over a two-year period, and an additional 11% made only one transaction.
At a minimum, people should review and rebalance their portfolios annually, especially when their life-circumstances change: marriage, having kids, retirement, and so on. There’s nothing to save us from our own financial mistakes. The most common mistake is making no decisions at all.
Douglas R. Tengdin, CFA
Chief Investment Officer