A lack of confidence is as dangerous as being overconfident

Whatever type of risk profile and long-term returns you’re looking for there will be an investment market for you. The stock market offers access to nearly every type of investment asset you can think of and is commonly used as a means of growing funds on a long-term basis. We often talk about investors who are overconfident and how this can impact their returns going forward. However, a lack of confidence is as dangerous as being overconfident.

Think with your head not your heart

We’ve all been in a situation where we think an investment looks interesting on a long-term basis but we are a little reluctant to jump in (this can happen with markets on the whole). It is only when a particular share has begun to pick up that our confidence begins to grow and we then begin to follow the crowd. This lack of confidence in your initial research, and your initial views of the stock, could cost you dearly in the longer term by having to pay more.

A lack of confidence is as dangerous as being overconfident
Go with your head not your heart

There is nothing wrong in paying a few cents more as long as there is a good long-term return but sometimes, due to a lack of confidence, investors hold off until the shares are significantly more expensive than when they first “discovered them”.

Step-by-step

Investors often make the mistake of thinking it is literally all or nothing with regards to the funds they put aside for a particular asset. This is not the case as only with luck would you buy at the bottom of the market or sell at the top. Is there anything wrong in splitting your overall investment into individual tranches and investing one at a time?

The mindset that it is literally “all or nothing” often overrules the common sense approach. By investing in tranches this allows you to “put a toe in the water” and if the stock moves further down you can buy cheaper and if it moves up you can begin to build your exposure. If the situation has not changed and the stock moves down then what is stopping you from buying further shares? You go in with your eyes open, with a maximum investment in mind and the understanding that any investment offers a degree of risk.

Buying on the way up

The idea of buying your first tranche of stock relatively low and increasing your exposure as the shares move higher may seem bizarre to some people. Too many investors spend too much brainpower wishing they had invested everything at the lower price when in reality that price has gone. However, if the price is moving higher that would indicate better prospects for the company so there is nothing wrong in increasing your exposure on the way up.

Remember, as you invest each tranche on the way up, due to the averaging effect, your average price will always be lower than the current share price. This is a very useful way to build up long-term exposure in companies which are doing particularly well although it may have taken the market some time to recognise this. So, a lack of confidence to go with your own judgement can sometimes be as dangerous as being overconfident.

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