May 1, 2024

Bucks Blog: The Costs of Underconfidence

Carl Richards

We often talk about the problems that can come from being overconfident in making investment and financial planning decisions. What we don’t talk about as much is the high cost of being underconfident.

I often joke that you wouldn’t want an overconfident brain surgeon, but you don’t want an underconfident one either. The line between the two, though, can be fuzzy. So what does underconfidence look like?

1. I’m not worth that much.

The last time you applied for a job, how confident were you in negotiating your salary? Did you go in thinking I’ll be happy with whatever they offer or were you prepared to ask for more? Maybe you have lumpy income from freelance work. I know how hard it is to set a value on what you do. It’s more likely that we’ll go under than over. That underconfidence may end up costing you money. Humility is great, but it shouldn’t cost you an opportunity to earn what you’re worth.

2. I’m not sure I made the right investment decision.

Assuming that you’ve built a well-designed, diversified investment strategy based on a clear understanding of your current goals, you should feel confident. But even the best investment strategy will go through times of stress and second guessing. In fact, if we build our portfolios wisely — a diversified mix of low-cost index funds — by definition, parts of our portfolio are likely to be down when others are up.

We wouldn’t be human if we didn’t second-guess our decision when stocks go up and part of our portfolio is diversified in safe fixed-income investments. But not having the confidence to stick with that plan can lead us to make the big mistake: bailing on the plan.

3. I don’t like dealing with money.

We often spend a lot of time focused on our investments because we think that they’re the most important thing. But in reality, the choices we make every day with money often have a much bigger impact on our success over time — things like how much we save, how much we earn and how much we spend.

And while we can get help from people about how to be smarter savers, the hard work comes down to us. It can’t be outsourced. We need to have enough confidence to say no to certain things so we can say yes to the more important ones.

The only person who can do that is you. It takes a certain level of confidence to know when to say yes and when to say no, especially when it comes to sticking with a spending plan when all our friends don’t seem to have one.

At times, it may feel as if you’re walking a fine line between being too confident and not being confident enough. But here’s the thing: If you’ve taken the time to think things through, to have the conversations about what matters most and then make a plan, it’s an easier line to walk.

Article source: http://bucks.blogs.nytimes.com/2013/03/05/the-costs-of-underconfidence/?partner=rss&emc=rss

Shares Drop on Renewed Concerns About Growth and Debt

Stocks declined and the dollar rose sharply on Wednesday after a German bond auction disappointed investors and new data pointed to continued uncertainty in the global economy.

Germany, which was seeking to raise as much as 6 billion euros, or $8.1 billion, in an auction of 10-year bonds, met demand for only 3.9 billion euros worth, leaving the state with twice as many leftovers as normal, the Bundesbank reported. The bonds, considered the safest government securities in the euro zone, were priced at an average yield of 1.98 percent, slightly above the prevailing market price.

Charles Diebel, head of market strategy at Lloyds Banking in London, described the auction flop as “a pretty significant buyers’ strike.”

“Seeing as these are supposedly the safe-haven asset of choice, people are concluding that the risk is becoming systemic,” Mr. Diebel said. The low demand, he said, may indicate that investors increasingly expect Germany and the European Central Bank, which together would bear a large portion of a major euro-zone bailout, “to go all in and support the euro.”

Their not doing so would mean that “the risk of a euro breakup increases,” he said.

The German debt management agency blamed “the highly nervous market environment,” and said it would not cause the country any financing problems, as the remainder of the securities would be sold onto the secondary market.

At the close of trading, the Standard Poor’s 500-stock index was down 2.21 percent. The Dow Jones industrial average fell 236.09 points, or 2.05 percent, to 11,257.55, and the Nasdaq was off 2.43 percent.

Light trading volume on Wall Street ahead of the Thanksgiving holiday on Thursday exacerbated the market trend, said Jason D. Pride, the director of investment strategy at Glenmede.

“Beyond that, this situation in Europe is definitely very worrying for a lot of investors,” he said. “The reality is they have yet to put together a plan that makes sense, and that leaves open this gaping hole of potential downside effects.”

The weak demand in the German bond offering suggested more that investors did not want to invest in Europe as a whole, Mr. Pride said, rather than signaling fears of a German default.

Elsewhere in the bond market, the yield on the United States 10-year government bond fell 2 basis points to 1.93 percent, while the comparable German bond was up 16 basis points at 2.08 percent. A basis point is one-hundredth of a percent.

The yield on the Italian 10-year bond rose 15 basis points to 6.94 percent, while the yield on the Spanish 10-year rose 5 basis points to 6.585 percent.

French 10-years were trading to yield 3.669 percent, up 16 basis points, hurt by a report on Dexia, the failed French-Belgian lender, in the Belgian newspaper De Standaard.

In European equities, the Euro Stoxx 50 index, a barometer of euro zone blue chips, fell 1.9 percent, while the FTSE 100 index in London fell 1.3 percent. German shares were down 1.4 percent and in Paris the CAC 40 was 1.7 percent lower.

The dollar gained against other major currencies. The euro fell 1 percent to $1.3356 from $1.3505 late Tuesday in New York.

A weakening of manufacturing activity in China and the euro zone also weighed on sentiment, while data in the United States continued to show a slower recovery.

A European index based on a survey of euro zone purchasing managers showed manufacturing output in the 17-nation bloc falling for a fourth straight month, dropping at the steepest rate since June 2009, Markit, a data services provider said. A separate index tracking services activity fell a third month, Markit said.

In the United States, the Commerce Department said new orders for durable goods in the United States fell 0.7 percent in October, compared with 0.8 percent the previous month. Non-military capital goods orders fell 1.8 percent, the department said, after a 2.4 percent increase the month before.

“Capital goods order activity in October was disappointing and the up and down movement reflects the uncertainty that exists in the economy,” said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance.

In addition, initial filings for jobless benefits rose by the end of last week, to 393,000, the Labor Department said, or slightly higher than the 390,000 forecast. Consumer spending also continued to show weakness.

Asian shares were lower across the board. The Sydney market index S.P./ASX 200 fell 2 percent. In Hong Kong, the Hang Seng index dropped 2.1 percent and in Shanghai the composite index fell 0.7 percent. The Tokyo market was closed for a holiday.

Bettina Wassener contributed reporting from Hong Kong.

Article source: http://www.nytimes.com/2011/11/24/business/global/daily-stock-market-activity.html?partner=rss&emc=rss