Avoiding Overconfidence by Knowing What Type of Investor You Are

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Among the many unintended consequences of the internet is an unrealistic sense of overconfidence. Researchers are finding people who believe they possess a level of skill or expertise after watching instructional YouTube videos. For example, some people believe that they can impersonate Michael Jackson’s moonwalk dance by merely watching a video about it, according to NPR’s Shankar Vedantam.

Overconfidence, especially when it comes to overestimating one’s abilities, is nothing new. The well-documented Dunning–Kruger effect is the failure of people to recognize their own level of incompetency. This mental misinformation drives investment decisions and causes people to believe their returns are higher than they actually are. This is why behavioral scientists, such as Daniel Kahneman, advise tracking actual performance to see how you are doing.

Among the ways overconfidence can manifest itself in a person’s portfolio is prompting them to invest in a manner or in securities that they shouldn’t. Examples include options and currencies. Skilled salespeople and instructors pitch seminars and online courses with the promise of training investors on how to realize BIG returns. Often, it’s the sponsor of the course who is raking in the dollars, not the participants.

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AAII Model Portfolio Update

No changes were made to the Model Shadow Stock Portfolio.

Seven of the stocks currently held in the Model Shadow Stock tracking portfolio qualified for purchase: Beazer Homes USA Inc. (BZH), CPI Aerostructures Inc. (CVU), Flexsteel Industries Inc. (FLXS), Hallador Energy Co. (HNRG), New Home Company Inc. (NWHM), Olympic Steel Inc. (ZEUS) and Universal Stainless & Alloy Products (USAP). Qualifying companies are those held in the Model Shadow Stock Portfolio that currently meet the initial purchase rules.

The Model Shadow Stock Portfolio, which is a real-money portfolio of micro-cap value stocks, rose 15.9% during January. By comparison, the portfolio outperformed the S&P 500 large-cap index, which rose 8.0% in January when including dividends (total return). It also outperformed two small-company benchmarks: The Vanguard Small-Cap Index fund (NAESX), which gained 11.8% on a total-return basis, and the DFA U.S. Micro Cap fund (DFSCX), which saw a total-return gain of 10.1% during January.

Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 14.6% versus the Vanguard 500 Index fund’s (VFINX) gain of 9.2% per year on average over the same period. Over the same period, the Vanguard Small Cap Index fund (NAESX) posted an average annual gain of 9.9%.


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Highlights from this month’s AAII Journal


AAII Sentiment Survey

The percentage of individual investors expecting an increase in stock prices rebounded this week, according to the latest AAII Sentiment Survey. Neutral sentiment declined, while pessimism is slightly higher. More about this week’s results.

This week’s results:

  • Bullish: 39.3%, up 4.2 points
  • Neutral: 35.3%, down 4.5 points
  • Bearish: 25.4%, up 0.3 points

Historical averages:

  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

Take the Sentiment Survey.


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The Week Ahead

Earnings season will begin to shift toward the retailers. Thirty-two S&P 500 companies are scheduled to report, including Dow Jones industrial average component Home Depot Inc. (HD) on Tuesday.

The week’s first economic reports will be December housing starts and building permits, the December Case-Shiller home price index and the Conference Board’s February consumer confidence survey, all of which will be released on Tuesday. Wednesday will feature December international trade, December factory orders and January pending home sales. Preliminary fourth-quarter GDP and the February Chicago Purchasing Managers’ Index (PMI) will be released on Thursday. Friday will feature December personal income and spending, the February PMI manufacturing index, the February Institute for Supply Management (ISM) manufacturing index and the University of Michigan’s final February consumer sentiment survey results.

Federal Reserve chair Jerome Powell will give his semiannual testimony to Congress on Tuesday and Wednesday. Other Fed officials making public appearances are Philadelphia president Patrick Harker and vice chairman Richard Clarida on Thursday and Atlanta president Raphael Bostic on Thursday and Friday.

The Treasury Department will auction $40 billion in two-year notes and $41 billion in five-year notes on Monday and $32 billion in seven-year notes on Tuesday.


Local Chapter Meetings

AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!

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