Too Much Confidence Is Bad for Your Portfolio


Investor-UpdateHigher levels of confidence about one’s ability to invest lead to worse returns. I realize that this may seem counterintuitive to some of you, but this is the conclusion of a study accepted by the Journal of Behavioral and Experimental Finance (an earlier version of the study is available on SSRN). It’s yet another example of how our brains can be harmful to our portfolios.

The researchers accessed the brokerage records and demographic data for clients of the largest discount broker in the Netherlands. Brokerage statements were matched up with the results of monthly surveys measuring investors’ confidence. One advantage of studying Dutch investors is that there are no capital gains taxes in the Netherlands, therefore eliminating the influence of tax-loss harvesting decisions. The sample period was April 2008 through March 2009. Authors Arvid Hoffman and Thomas Post of Maastricht University say the high level of volatility that occurred during this period was “beneficial” for their analysis.

Those investors with above-average levels of confidence traded more. Their average monthly turnover was 8.6% higher than investors with below-average confidence. The most confident investors traded even more frequently, with 10.3% greater turnover than other investors. This higher level of trading did not lead to better returns. Rather, the average monthly returns realized by investors with above-average confidence were 0.88% worse than the monthly returns for investors with below-average confidence.

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More on

  • Trading More Frequently Leads to Worse Returns – One of the most cited studies about the adverse impact of making more transactions was conducted by Terrance Odean and Brad Barber. Terry discussed their findings in this November 2014 AAII Journal article.
  • Think Twice, Even Thrice, Before Trading – A separate analysis by Mark Hulbert found that returns for many newsletters would have been higher if they had issued fewer buy and sell alerts.

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Highlights from the AAII Journal

AAII Sentiment Survey

Neutral sentiment rose to a two-month high and optimism rebounded to a four-week high as pessimism plunged. More about this week’s results.

AAII Asset Allocation Survey

Fixed-income allocations among individual investors fell last month to their lowest level in over a year, though they still remain above their historical average. More about the latest results.

What’s Trending on AAII

  1. Bond Pricing Made Simple
  2. Why Value Beats Growth: A Brief Explanation
  3. Exploring the Optimal Equity Allocation Path for Retirees

The Week Ahead

The U.S. stock exchanges will be open on Monday, Columbus Day, even though it is a federal holiday.

The first “official” week of third-quarter earnings will feature four banks: Dow Jones industrial average component JPMorgan Chase & Co. (JPM) and fellow S&P 500 members Citigroup (C), PNC Financial Services Group (PNCand Wells Fargo & Co. (WFC). All of them will announce their results on Friday. Also reporting next week will be S&P 500 members Alcoa (AA) and Fastenal Co. (FAST) on Tuesday, CSX Corp. (CSX) on Wednesday, and Delta Air Lines (DAL) and Progressive (PGR) on Thursday.

The week’s first financial reports will be the Labor Department’s August Job Openings and Labor Turnover Survey (JOLTS) and the minutes from the Federal Open Market Committee’s (FOMC) September meeting, both released on Wednesday. Thursday will feature September import and export prices and the September Treasury budget. The Bureau of Labor Statistics’ producer price index (PPI) final demand for September, September retail sales, August business inventories and the University of Michigan’s preliminary October consumer sentiment survey will be released on Friday.

Five Federal Reserve officials will make public appearances: Chicago president Charles Evans on Monday; Kansas City president Esther George on Wednesday; Philadelphia president Patrick Harker on Thursday; and Boston president Eric Rosengren and Chair Janet Yellen on Friday.

The Treasury Department will auction $24 billion of three-year notes and $20 billion of 10-year notes on Wednesday, and $12 billion of 30-year bonds on Thursday.

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