One of the things my husband, who is about done with a Ph.D. in psychology, tells me is that studies show that most people think that they are above average. We are inclined to believe that we are smarter than the average, or that we have more skill in a certain area than the average. This idea of being “above average” can lead to more than just a bias in our own favor. Overconfidence in matters of investing can actually hurt your portfolio.

Sources of Overconfidence

Your overconfidence may come from a number of sources. You might believe that you are a stock picking genius because your investment is doing well. In the run up to the recent crash, many people probably thought that they were smart investors because they were making money. Unfortunately, what they were attributing to their investment savvy was really just a market that was performing well at the time. Many of these same investors didn’t manage to see the crash coming, and lost what they gained. Of course, when something goes wrong, one is inclined to blame it on the vagaries of the market, rather than look at their own mistakes. It’s best to know how money works, and be humble about your abilities.

Another issue is that past performance of an investment may provide confidence that more gains are coming. While past performance can be a helpful part of the big picture, it is important that you don’t assume that the investment will continue to perform as well as it has in the fast. Remember that things can change, and that there is a first time for everything.

Finally, sometimes a mistake is made when you are overconfident about your broker. While brokers and financial plan managers can be great sources of information, and can even steer you in the right direction, it is important to realize that even these “experts” don’t always know exactly what will happen. Another mistake is to have too much confidence in your broker’s desire to do what’s best for you. Find out how your investment broker is getting paid, because that could be an indication that he or she is more concerned about what’s in their pocket – and not what’s in yours.

Dangerous Effects of Overconfidence

One of the most common effects of overconfidence is overtrading. If you think that you are a trading genius, you will be more likely to buy and sell more often. The transaction fees can add up, eroding your returns. Not only that, but if you are sure that you can properly time the market, and you are wrong, you could miss out on big gains – or lock in large losses. Be careful about the money that you hazard in such ventures; make sure you can afford to lose it.

If you are too confident about your broker, you might not look around for better investment portfolio fits. This means that you could be paying more money for managed accounts, but your portfolio could still be underperforming. Do your research, and make sure that you really are getting the best value for your money when it comes to brokers and investment managers.

Is It So Bad to Be Average?

In the end, is it really so bad to be average? For many people, an investment portfolio that is average still provides enough for a decent retirement income (assuming they start early enough). Income investments that perform with the average still provide a regular stream income – and in some cases it can be a more stable income that you can rely on.

Before you become too overconfident about your ability to beat the market, consider the danger associated with overconfidence, and re-evaluate your position. Maybe average isn’t so bad. And it might be a little safer.