At a financial planning convention we attended recently, one of the speakers remarked that the opposite of reckless over-confidence is not lack of confidence but dangerous inaction. That observation struck me because in our years in the financial planning profession, we have seen clients fall prey to both extremes. Some are convinced they can outsmart the market and end up trading themselves into trouble, while others, paralysed by fear of making a mistake, wait endlessly for the ‘perfect time’ to invest and miss out on growth altogether. It is this tension between confidence and caution that prompted us to write this piece.
Understanding overconfidence bias
Overconfidence bias occurs when investors overestimate their knowledge, downplay risks, or believe they can predict outcomes with greater accuracy than is realistically possible. It is a deeply human tendency to put too much faith in one’s own judgement, even when information is partial or uncertain. In practice, this misplaced certainty can manifest in two very different ways: the urge to act too boldly or the refusal to act at all – and recognising the subtle ways in which over-confidence presents itself is an essential step in managing it.
Important to note: Recognising bias in yourself is the first safeguard against making decisions that feel certain but are built on shaky foundations.
Reckless over-confidence: Stock picking and market timing
At its most obvious, overconfidence convinces investors that they have an edge over everyone else – something that usually results in stock picking, attempts to time entry and exit points, or chasing the latest performance story. The temptation is particularly strong when markets are rallying and headlines are full of overnight success stories. Yet the evidence is clear: even seasoned fund managers, with vast resources and research teams, struggle to consistently outperform the market through timing or stock selection. For individual investors, reckless overconfidence often translates into over-trading, higher costs, concentrated risks, and disappointing returns. We have seen clients lose significant capital by acting on instinct, believing they had spotted the next big winner, only to find themselves chasing performance while compounding eluded them.
Important to note: Chasing returns usually ends in higher costs and lower performance, eroding wealth instead of building it.
The other extreme: Paralysis through inaction
Less visible but just as damaging is the form of overconfidence that leads to paralysis. Here, investors believe they will know precisely when the right moment arrives and, in the meantime, decide to wait. Sadly, the assumption that greater clarity will materialise at some future point is an illusion. This is because inflation quietly erodes cash, compounding opportunities that slip away, and fear keeps capital idle. We have sat across from clients who kept large sums uninvested for years, waiting for a mythical moment of certainty – only to find that by the time they were finally ready to commit, markets had moved on and the returns they hoped to capture were gone. Ironically, the effort to avoid making a mistake can become the costliest mistake of all.
Important to note: Waiting for the ‘perfect time’ to invest is itself a costly decision, as inflation and lost growth quietly compound the loss.
Why both extremes are risky
Despite their differences, both reckless action and paralysing inaction stem from the same root: misplaced certainty. Believing one can consistently predict the market leads to unnecessary risks, while believing one can identify the perfect entry point assumes a foresight no one possesses. Markets are, by their nature, unpredictable. Long-term success does not come from prediction but from process—from building resilient portfolios that can endure volatility and uncertainty. True confidence lies not in knowing what will happen next but in trusting a disciplined strategy to carry you through.
Important to note: Sustainable wealth creation depends less on prediction and more on disciplined, process-driven investing.
Finding the right balance
The antidote to overconfidence bias is measured decision-making, which involves resisting the temptation to time markets, avoiding concentration in a few stocks, and ensuring adequate diversification across assets. It also means committing to a strategy aligned with personal goals and time horizons and applying it consistently, regardless of market noise or emotional impulses. In our experience, clients who achieve the best outcomes are not those who claim insight into the next market move, but those who remain patient, disciplined, and invested. We also believe that professional advice adds another layer of value, providing an impartial perspective that tempers both impulsive trading and fearful hesitation.
Important to note: Balance is achieved by aligning investment choices with long-term goals and applying them consistently, not by guessing market moves.
Remember, confidence itself is not the enemy. A measure of conviction is vital to staying invested during volatile times and remaining faithful to a long-term plan. But confidence must be grounded in discipline, diversification, and trust in the process—not in the illusion of control over markets. Healthy confidence is steady rather than bold, decisive without being reckless, and patient without being paralysed. Simply put, confidence enables investors to act when necessary and to stay the course when the future feels uncertain.
Have a wonderful day.
Sue
