Overconfidence Can Kill Your Returns

Especially during a bear market, it's easy to lose confidence in your investments. But overconfidence can be equally dangerous Unfortunately, stock analysts seem to rank among the world's biggest optimists. One study has shown that analysts routinely and substantially overestimate earnings growth. Other research has noted even bigger disparities between forecasts and actual growth figures. Get original file (18KB) Sure, Wall Street analysts are famous for their conflicts of interest, often waxing bullish on companies from which their firms stand to benefit. But they're not alone in their wildly off-the-mark predictions; supposedly sober economists are prone to miss growth estimates, too. This shouldn't be surprising. Overconfidence is a common part of human nature. Too many ordinary people overestimate their prepations for retirement (and pay a gruesome price). CEOs fall prey to hubris when engineering mergers. And the research of finance professors Terrance Odean, Brad Barber, and Simon Gervais has linked investors' cockiness to frequent trading, which can diminish investment returns. Dial back that swagger To avoid these pitfalls, be realistic about your investments. Over the long haul, the stock market has averaged 10% a year; during your investing life, that figure could average more -- or much, much less. By the same token, a stock can have one lousy year, but still do well over the long run -- and vice versa: Company 2008 Return 20-Year Average Annual Return Black & Decker (NYSE: BDK) (38%) 3% Wal-Mart (NYSE: WMT) 20% 14% Stanley Works (NYSE: SWK) (28%) 9% Heinz (NYSE: HNZ) (17%) 9% Archer-Daniels-Midland (NYSE: ADM) (37%) 11% Colgate-Palmolive (NYSE: CL) (10%) 16% Target (NYSE: TGT) (30%) 12% Data: Yahoo! Finance, Morningstar. It's OK to be confident about your investments. Just make sure you've backed up that certainty with plenty of research, lest your own hubris get the better of you -- and your portfolio. Copyright © 2008 Universal Press Syndicate.