Types Of Investors: Why Being Overconfident Can Cause More Losses

There are all different types of investors in the world. Some are strategic and ambitious, seeking avenues to maximize income from the markets in a short time. Others are cautious and risk-averse and adopt a more methodical approach. There’s no universally “correct” approach, and to some extent, it’s wise to match your investing style to your own financial situation and goals. There are however some issues that are more or less universally problematic with making investments — and one is overconfidence.

This also happens to be an issue that is often directly associated with physicians when it comes to financial management. Of course, some will make better investors than others. But as a New York Times piece on doctors and investment put it years ago, “a combination of factors can conspire against success.” It’s actually a fairly complex point, but the general idea is simple: Physicians tend to have disposable income, (justifiably) high opinions of their own intellects, and a belief that cause and effect are direct and logical. This, coupled with the fact that doctors are often targeted for investment, can lead to hasty and/or overconfident approaches.

Now, there’s something to be said for a degree of confidence or decisiveness in financial matters. But there are also a few reasons that being overconfident can cause more losses.

Going It Alone

Almost by definition, an overconfident approach to trading means taking your transactions into your own hands. In particular, physicians who are so used to succeeding on the basis of their own intelligence and hard work, it can feel perfectly natural to simply open a portfolio, make some investments that seem to make sense, and wait to earn a profit. But a solo approach like this, particularly for a relatively inexperienced, new investor, or a physician who is not able to dedicate the hours of time required,  is every bit as likely to result in a loss as to generate financial growth.

Furthermore, it’s unnecessary given the amount of assistance available. Education in financial management and accounting used to be at least somewhat of a niche practice. But these industries have grown, and in particular, the option of earning related degrees online has led to the emergence of a lot of well-trained professionals. According to the online accounting degree program at Maryville University, there are now hundreds of thousands of active jobs in the fields of “financial advisor,” “financial analyst,” and “financial manager.” That’s an awful lot of people who specifically work to help others invest strategically, and physicians (as well as others who may struggle with investment) should take advantage!

Hurried Reactions

Reactionary trading is sometimes framed as a manifestation of panic, and in some cases, it certainly can be. But reacting too quickly or readily to shifts in the market is also a sign of overconfidence. To make a decision based on something that’s just happened in the market implies that you know how to handle it — that you’ve assessed the situation and adjusted in a way that you believe will preserve or regain your investment. Sometimes it can work out. But just as often, reactionary trading only gets you into more trouble.

Generally, a patient approach is both more humble and more sensible. In fact, this is something we saw demonstrated at virtually all levels of investing just last year. When the spread of the coronavirus led to worldwide recessions, plenty of investors and even investment firms reacted, selling off assets at a loss to avoid greater catastrophes. However, as an assessment from West Virginia University’s finance department put it, it’s typically better in times such as those to “stick to your long-term plan and ignore day-to-day market fluctuations.” That doesn’t mean dramatic market events should be ignored. But it’s a reminder not to get too confident about managing changes you see. Trust a long-term strategy instead, and you’re more likely to come out on top.

Shrugging Off Poor Strategies

In a more general sense, overconfident investors are also prone to shrugging off poor outcomes, attributing them to bad luck rather than bad strategy. If you’re an overconfident trader, in other words, and you lose money on an investment you believed would serve you well, you’re likely to assume some sort of fluke occurred. Now, we just discussed that it’s generally a bad idea to sell in a panic; you shouldn’t necessarily take a loss and change your whole strategy. But it is at least a good idea to assess why investments go wrong when they do. Assuming the error lies beyond your own plans and actions is a recipe for repeating the error.

Overestimating Ability

This ties into some of the points made above. But arguably the most basic, fundamental manifestation of overconfidence in trading is overestimating your ability, and trying to profit-based purely on skill and intuition. This tends to mean that you attempt to time trades, profiting on individual transactions rather than long-term strategies. As CNBC’s recommendations for novice investors point out though, “it’s time in the market, not timing in the market that matters.” Trusting a long-term approach — ideally, one developed with the help of a financial advisor of some kind — is a far better, and far more humble strategy. It’s also likely to benefit you more financially.

All in all, it can be easy to approach investing with a strong sense of confidence in your own ability — particularly if you’re used to success and you have disposable income. These are the reasons why physicians are sometimes associated with less-than-careful investment strategies. But all that’s really needed if you’re to avoid these issues is a slightly more strategic approach that relies on financial expertise. A little bit of assistance from a financial advisor won’t take you out of things completely. Your priorities and decisions will still drive your investments. But they’ll be based on advice from professionals whose work is based on experience and relevant knowledge rather than raw confidence.