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How Good do You Think You Are at Investing?

Intelligent Investing

How Good do You Think You Are at Investing?

Do you deliver better than average work at the office? Do you drive better than the average person on the road?

It is likely that you answered ‘yes’ to both of those questions.

There is a fair amount of research that finds that a majority of people will almost always rate themselves as ‘above average’ on these kinds of issues.

In 2018, a study found that 65% of Americans consider themselves of above average intelligence. A survey of 1 million high school students in 2005 reported that 70% of them believed that they were above average leaders. And a famous paper published all the way back in 1981 discovered that 88% of a sample of American graduate students and 77% of Swedish graduate students rated themselves as better-than-average drivers.

Our positive illusions

Statistically speaking, it is obvious that these responses can’t be accurate. By definition, a significant majority of any sample can’t be above average.

Humans, however, have a natural tendency to believe that they are better than they are. And, for the most part, this is not unhealthy. In a 2011 paper, researchers from the University of Amsterdam wrote:

“Mentally healthy people blissfully suffer from what are called positive illusions: they overestimate their abilities, as well as their control over events, and they underestimate their vulnerability to risk.”

However, this does come with its drawbacks. For example, surveys have found that as many as 88% of people use their mobile phones while they are driving, even though the risk is well known. One can assume that people do so anyway because they have a belief in their own superior driving abilities.

The money problem

Unfortunately, many people also overestimate how much they know about investing and finance. They think that they can make better decisions than the average person, and that they can beat the market.

This is not just among everyday investors. Professional fund managers have the same bias, even though they are also unlikely to be right.

Research over many decades has shown that most active managers don’t beat the market. The most recent S&P Indices vs Active (SPIVA) scorecard in the US shows that a little over 15% of US large-cap fund managers beat the S&P 500 over the past five years. Over 10 years, less than 10% managed to outperform.

However, we firmly believe that Active managers have a huge role to play, more so considering the South African situation. Furthermore, our managers are amongst the most successful over any meaningful time period.

Underestimating risk

For individual investors, however, the risks can be really meaningful. As a new paper about financial literacy in Saudi Arabia points out:

“Overconfidence in financial knowledge results in poor financial choices and ultimately leads to financial losses for individuals.”

The reality is that being too confident about our investment ability means that we underestimate the risks we might be taking. When we are sure that we are right, we don’t think enough about what might happen if we are wrong.

To discuss your long-term investment strategy, speak to a Silverspoon Investment Professional.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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