In the Broadway musical Hamilton, Eliza rhetorically sings to her husband Alexander Hamilton:
Do you know what Angelica said
When she read what you’d done?
She said
“You have married an Icarus
He has flown too close to the sun.”
Icarus? Here’s a quick Greek mythology lesson:
Icarus and his father, Daedalus, were imprisoned on the isle of Crete. To escape, Daedalus crafted wings from feathers, cloth, and wax. Before taking flight, Daedalus warned Icarus of two risks: complacency and hubris. Flying too low (complacency) would soak the wings in seaspray and he’d fall into the ocean. Flying too high (hubris) would melt the wax and destroy the wings.
Upon taking flight, Icarus got too excited. He, a simple human, was flying after all. So he flew too high, melted his wingwax in the sun’s heat, and plummeted to his death in the ocean. Icarus’s failure warns us against overconfidence and hubris.
But let’s not forget that complacency and fear was a risk Icarus faced. Both risks are important for investors. We wrote about overconfidence in investing at length last week. Common features include:
- Market timing
- Stock picking
- Seeking too much risk
- Using leverage
- Seeing skill (especially in your own choices) where none exists
But complacency and underconfidence are big investing issues too. Here are 6 ways complacency and underconfidence plague individual investors.
Not Starting
“Jesse – I just don’t know where to start.”
I totally get it. Putting money at risk is scary. Especially if you feel like you don’t know what you’re doing. But that fear will prevent you from ever starting. Time – and compounding – are wasting away.
Just start. Here are some tips. My advice: put some skin in the game. It doesn’t have to be a ton. But it will motivate you to learn and keep going.
Too Much Short-Term
The underconfident investor is too in love with bank account interest and U.S. treasury bonds. These assets, of course, have their place in a balanced portfolio. It’s a great home for short-term money
But money needed in 10+ years should largely be invested in diversified stock funds.
Avoiding Uncertainty
Related to the last idea, underconfident investors shy away from uncertainty.
U.S. stocks’ proposition is: maybe +30% per year, maybe (-20%) per year, but over the long run about 10% per year.
If that type of uncertainty makes you nervous, you can (and probably should) reduce your stock allocation. But you shouldn’t avoid stocks altogether.
Panic Selling
The confident investor knows that markets are cyclical. Bear markets and outright crashes have always occurred, and likely always will.
The underconfident investor thinks “this time is different” and falls victim to panic. They sell their investments at a loss.
You need to avoid scenarios where you must “sell to survive.”
Never Rebalancing
The complacent investor sits on their laurels. But most portfolios require rebalancing.
Forgetting That Markets Change
I’ve written The Best Interest since 2018. Many of my earlier articles (like this and this) reminded readers that we we were in the midst of a huge bull market that would not last forever!
I wrote those posts because many young investors were saying things like, “Yep…I’ll just get these 17% annual returns for another decade, then I’ll retire.” That’s complacency! Perhaps it’s overconfident complacency, but it’s complacency nonetheless.
Markets change. The economy is cyclical.
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-Jesse
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