American Overconfidence Compared to Underconfidence ... Too Little Is Worse Than Too Much

Confidence is felt but not seen. Yet it's a big deal in life, as in investing. Too much of it often leads to unnecessary defeat and disaster, and too little leads to underachieving or even not participating.

For long term investors, having confidence, but not cockiness, about the future is important to successful investing. Today most of us are both confident and concerned about the future, I would guess.

We're confident that things will continue to improve but concerned that they won't improve by all that much. But that's too short a timeframe for me. Let's consider the long-term outlook more fully.

It's a hard thing to figure, as detailed in Yes, We're Confident, but Who Knows Why:

"THE recovery in housing, the stock market and the overall economy has finally gained sustainable momentum — or so it is said.

 

That opinion seems to be based on several salient facts. Unemployment has been declining, from 10.0 percent in October 2009 to 7.7 percent last month. More spectacularly, the stock market has more than doubled since 2009 and has been especially strong for the last six months, with the Dow Jones industrial average reaching record closing highs last week and the S.& P. 500 flirting with superlatives, too.

 

And the housing market, seasonally adjusted, has been rising. The S.& P./Case-Shiller 20-city home price index gained 7 percent in 2012.

 

These vital signs make many people believe that we’ve turned the corner on the economy, that we’ve started a healing process. And their discussions often note one particular sign of systemic recovery: confidence. There is considerable hope that the markets are heralding a major development: that Americans have lost the fears and foreboding that have made the financial crisis of 2008 so enduring

in its effects.

 

Hope is a wonderful thing. But we also need to remember that changes in the stock market, the housing market and the overall economy have relatively little to do with one another over years or decades. (We economists would say that they are only slightly correlated.) Furthermore, all three are subject to sharp turns. The economy is a complicated system, with many moving parts.

So, amid all those complications, there are other possibilities: Could we be approaching another major stock market peak? Will the housing market’s takeoff be short-lived? And could we dip into another recession?

 

There are certainly risks. Congress is mired in struggles over the budget crisis and the national debt.

The government is questioning the risk to taxpayers in its huge support of housing through Fannie Mae, Freddie Mac, the Federal Housing Administration and the Federal Reserve. Problems in Europe, Asia and the Middle East could easily shift people’s confidence. There have been abrupt and significant changes in confidence in European markets since 2009. Is there any reason to think that the United States is immune to similar swings? . . . 

      

Clearly, confidence can change awfully fast, and people can suddenly start worrying about a stock market crash, just as they did after 2007."

 

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Now let's examine both overconfidence and underconfidence more broadly and learn why I believe underconfidence may be worse for our economic health than what we commonly call cockiness, which is not a good thing either. Maybe Goldilocks had it right all along. But what's "just right?"       

Being overconfident often leads to unnecessary defeat. On the other hand, lacking confidence often leads to not even making the effort to succeed. As 5'7" NBA Dunk champion Spud Webb put it, "If you can dream it, you can do it." To which I would only add, but you have to try it before you will be able to do it.

There's a fine line between being overconfident and underconfident, and this confidence factor impacts virtually all areas of our lives, including investing.

But in my view, underconfidence is threatening the very fabric of what it means to be an American these days. We need to stop listening to our so-called political leaders tell us how they're going to save us from ourselves, and start listening to ourselves. As Spud said, if we can dream it, we can do it. That said, the secret, as always, is in the doing.

Come to think of it, isn't what what the American dream is all about?

The vast majority of us are perfectly capable of taking care of ourselves and our families. We don't need and shouldn't want the government knows best gang to do it for us.

But first we have to believe in ourselves and make the effort to do so. And that includes retirement savings and investing. So let's start our discussion the underconfidence factor as it relates to personal saving and investing.

The Costs of Underconfidence has the story:

"We often talk about the problems that can come from being overconfident in making investment and financial planning decisions. What we don’t talk about as much is the high cost of being underconfident. . . .

So what does underconfidence look like? . . .

Assuming that you’ve built a well-designed, diversified investment strategy based on a clear understanding of your current goals, you should feel confident. But even the best investment strategy will go through times of stress and second guessing. In fact, if we build our portfolios wisely — a diversified mix of low-cost index funds — by definition, parts of our portfolio are likely to be down when others are up.

We wouldn’t be human if we didn’t second-guess our decision when stocks go up and part of our portfolio is diversified in safe fixed-income investments. But not having the confidence to stick with that plan can lead us to make the big mistake: bailing on the plan. . . .

We often spend a lot of time focused on our investments because we think that they’re the most important thing. But in reality, the choices we make every day with money often have a much bigger impact on our success over time — things like how much we save, how much we earn and how much we spend.

And while we can get help from people about how to be smarter savers, the hard work comes down to us. It can’t be outsourced. We need to have enough confidence to say no to certain things so we can say yes to the more important ones.

The only person who can do that is you. It takes a certain level of confidence to know when to say yes and when to say no, especially when it comes to sticking with a spending plan when all our friends don’t seem to have one.

At times, it may feel as if you’re walking a fine line between being too confident and not being confident enough. But here’s the thing: If you’ve taken the time to think things through, to have the conversations about what matters most and then make a plan, it’s an easier line to walk."

Summing Up

That's great advice for saving and investing. But there's much more to our great American lives than just that. Self reliance should be everybody's goal.

And for those who can't reach that goal, the rest of us need to be there for them and help them out. That's what Americans do.

We're free to dream the impossible dream and to reach as high as we wish. In that regard, our reach should always exceed our grasp, and we should feel free to 'go for it.'

And as for what that "it" is that we dream about and 'go for,' well, that choice is up to us. Our individual dreams are our dreams, our individual goals are our goals, and our individual lives are our own. That's what being an American means to me.

Through nothing I accomplished on my own (thanks to Mom and Dad for that), I was born a citizen of a great freedom loving, individualistic focused, wonderful self governing society called America. It's a gift to be part of a country full of opportunities for each of us, but it's up to us to seize them.

Ideas are a big deal in America, and the basic idea of the Founding Fathers was that we're all equal and that we're all born with "certain unalienable Rights" such as "Life, Liberty and the pursuit of Happiness."

Nowhere in the Declaration of Independence is the government knows best gang referred to as the group best positioned to provide us with the necessities of live. We're each and all born that way.

Those basic ideas seem so out of favor these days. But not in my America.

In my America, we have the freedom to try, the freedom to succeed, the freedom to fail and then the freedom to try again and again when we do fail.

As legendary basketball Coach John Wooden said about success and failure, "Failure is never fatal and success is never final."

Or if you prefer football, legendary football Coach Vince Lombardi liked to say that he'd never played in a game that he couldn't win. It was just that some of them didn't last long enough.

That's the American way.

So let's be confident about our shared idea called America and its bright future, my fellow Americans.  And let's be confident about our own bright future as well.

In the end we'll win. We always have and we always will. Together as Americans.

So please don't let our government purveyors of gloom and doom instill the feeling of failure and victimhood in us. And for sure don't let them convince us that our salvation and success will in any way result from their efforts. That's just more of the same old political crap.

One great way to start on the road back to self reliance is not to become so dependent on Social Security benefits in the future.

And for those of us oldsters for whom it may be to late to do that, we can at least teach the younger folks about the dangers of that misplaced 'confidence' in our government.

That's my take.

Thanks. Bob.