Stewardship

Why Investors Are Overconfident and Why This Is Dangerous

by Brother Carlton 
01/06/25
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Most people aren’t naturally skeptical. They tend to think things will stay the same, especially when it comes to trends, like the stock market. If stocks are going up, they assume that will keep happening and find reasons to support their belief.

Right now, many investors think stocks will keep rising because of reasons like:

Lower interest rates from the Federal Reserve.
Optimism about new leadership, like Elon Musk or political promises.
Tariffs, which they mistakenly think help the economy.

Recent surveys show investors are incredibly confident about the market. In late 2024, a survey found that over half of respondents expected stocks to rise in the coming year—a record high. This confidence makes sense since the S&P 500 rose over 20% for two years straight, something that hasn’t happened since the late 1990s during the dot-com bubble.

But history shows stocks don’t go up forever. After the dot-com bubble peaked in 1999, the market crashed, with the S&P 500 falling nearly 46% from 2000 to 2002. Many people panicked and sold at the worst possible time.

To succeed as an investor, you have to survive market downturns. But many people today are taking huge risks by borrowing money to invest—this is called leverage. Leverage can make your gains bigger, but it can also make your losses devastating.

Right now, investors are borrowing more money than ever:

There’s 100 times more money in funds betting on the market going up than on it going down.
Small investors are buying risky options instead of taking a steady, long-term approach.
Margin debt—money borrowed to buy stocks—is at record highs.

This behavior mirrors what happened in 1929 before the stock market crash that led to the Great Depression.

Why Leverage Is Dangerous

Using leverage is like gambling. Imagine you borrow $90 to buy $100 worth of stock, putting in only $10 of your own money. If the stock rises 10%, you double your money. But if it falls 10%, you lose everything. In 1929, many people lost fortunes because they borrowed too much, just like what’s happening now.

Today, leveraged funds and options are the modern versions of those risky investments. Investors are chasing quick profits without realizing the risks. History shows these schemes almost always end badly.

With stocks highly priced, and so much borrowing happening, investors should focus on managing risk. While some people might make quick money on risky bets, they’ll likely lose it all when the market crashes. True wealth is built slowly, over time, by surviving the ups and downs.

Investors tend to think the future will look like the recent past. Right now, that means they expect another 20% rise in stocks in 2025. But with record-breaking leverage and confidence, they’re setting themselves up for trouble. Smart investors should prepare for the inevitable downturns instead of gambling on short-term gains.

Brother Carlton ministers the gospel to the Los Angeles area. Formerly a Hollywood actor (SAG member) and property cleanup expert, he now spends most of his time studying the scriptures, writing articles, hymns, and poems, and doing street preaching. See all his videos on YouTube Brother Carlton.