Don't overestimate your knowledge in the stock market

By Dale Gillham. Published at May 1, 2020, in Investor 101

There is an old saying that you don’t know what you don’t know. In my experience, over the past few decades I have found there is one thing in common with both traders and investors and that is many overestimate their level of knowledge and competency when it comes to the stock market.

According to many surveys conducted by the ASX, it is common to find around 50 per cent of adult Australians believe they are very knowledgeable or somewhat knowledgeable when it comes to investing in shares. But given that investors have repeatedly made knee jerk reactions over the past two months out of fear and, at times, greed, it is for this reason why I believe investors overestimate their level of knowledge.

That said, the recent market conditions have caused many traders and investors to question whether they are as knowledgeable as they think they are. As Albert Einstein once said, education is the progressive realisation of our ignorance and no doubt, many would agree that over the past few months the stock market has taught them a lesson or two in how much they do not know.

Unfortunately, many will not learn and are doomed to repeat the mistakes of the past. History shows that time and time again people repeat their mistakes and end up throwing their money at the share market with little or no knowledge in the hope they will profit believing it will be different this time.

In the light of the GFC and the current market conditions, and how many have reacted to these events, I believe this proves how much Australians overestimate their abilities. This is often referred to as cognitive bias, whereby we believe we are better than we actually are, and the alarming thing is that we do not know that we are not very good or knowledgeable. Unfortunately, this means that investors operate under a false sense of security, which leads to overconfidence and mistakes in judgement.

Investing in the stock market is quite easy because it really comes down to following some simple rules but that is the key that most are missing.

Most don’t know which rules to follow and those that follow the masses end up losing money or breaking even at best.

As the old saying goes, your education will cost you one way or another and it’s your choice how much you pay.

Right now is the perfect time to educate yourself so that you do not repeat the mistakes of the past.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au

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