Behaviour
Circle of competence
The set of things you genuinely understand well enough to judge.
How it works
The idea is not that the circle must be large, but that you must know where its edge is. Investing outside it without acknowledging that is the source of most avoidable mistakes.
Being honest about the boundary is harder than expanding it, because expertise in one field creates false confidence in adjacent ones.
Related terms
- OverconfidenceSystematically overestimating your own knowledge, judgement and probability of being right.
- DiversificationSpreading money across things that do not move together, so no single failure can decide your outcome.
- Index fundA fund that aims to match an index rather than beat it, at very low cost.
More in Behaviour
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.