Think you've got investing skill? Your overconfidence may be costly

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When it comes to investing, you may know less than you think — and that overconfidence may be costly.

Almost 2 out of every 3 investors rate their investment knowledge highly, and 42% are comfortable making investment decisions, according to a recent report published by the Financial Industry Regulatory Authority. Younger investors ages 18 to 34 were more likely to be confident than those in older age groups (35- to 54-year-olds and those over age 55).

However, investors with more confidence also disproportionately answered more questions incorrectly on a financial quiz — suggesting that "many younger investors are not simply uninformed, but potentially misinformed," according to the report.

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Why your investment 'ego' may be costly

This isn't to say that confidence is a bad thing. But "overconfidence bias" — the behavioral principle of overestimating one's financial acumen — can have damaging results.

"It should be no surprise that for the average investor, overconfidence can potentially be a pathway to poor portfolio performance," Omar Aguilar, CEO and chief investment officer at Charles Schwab Asset Management, wrote on the subject.

For example, this "ego-driven tendency" might trick your brain into thinking it's possible to consistently beat the stock market with risky bets, Aguilar said. (Hint: Statistics show it's tough for the pros, so it's bound to be hard for the average person, too.)

Beyond adding potentially unnecessary risk to a portfolio, overconfidence might introduce higher relative costs associated with the frequent buying and selling of assets, Aguilar said.

Social media contributes to overconfidence

Technology and social media have also made it easier for people to develop false impressions of their own knowledge and skill, Egan said. For example, investors can fall prey to "confirmation bias," whereby they seek out evidence in social-media circles that confirms a previously held (but potentially false) belief about an investment.

Of course, technology and the internet have also made it easier than ever to access information — though users must then discern whether that data source is accurate and reliable.

And while younger investors may disproportionately overestimate their knowledge, the extent to which it's doing them harm is unclear, Egan said. They might not have amassed much money so early in their careers, meaning a mistake may be less costly relative to seniors, who've built up a sizable nest egg over their working lives and have more to lose.

When an investment is trendy, 'start watching yourself'

Similarly, overconfidence may lead rushed investors to accidentally buy the wrong stock, Egan said.

For example, many investors bought the stock of Signal Advance last year following a tweet by Elon Musk, who told followers to "use Signal," leading the stock to surge by over 400% in a day. However, investors inadvertently bought the wrong stock — the Tesla and SpaceX CEO was referring to the encrypted messaging app Signal, whereas Signal Advance is a small component manufacturer.

How to check your investing ego


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