Nothing is certain in the world of investing.
Although the long-term trend of the S&P 500 index has been up, nothing guarantees this result. Even during the S&P’s decades-long slog higher, there have been plenty of times when the index fund has fallen by 20% or more, sometimes topping even 50%.
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But without risk, there can be no reward, and in the markets, he who hesitates is often left behind. So, how can you confidently move forward in the face of such uncertainty? Follow the One Sigma Confidence rule.
What Is One Sigma Confidence?
The world of statistics is filled with impressive-sounding terms that are actually simple once you break them down. In a normal data set, One Sigma Confidence simply refers to the range covering roughly 68% of data points.
As an investor, you can use One Sigma Confidence to act decisively without being reckless. The idea is that if your level of conviction about an investment reaches roughly 70%, it’s time to act.
In a perfect world, you wouldn’t invest your money unless you had 100% certainty. But that simply doesn’t exist in the investment world, especially not in the stock market. If you wait for that type of pure clarity, it will likely only come after others have profited.
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How an ‘Entrepreneur’ Author Missed His Chance
A perfect example of the opportunity cost of inaction comes from Entrepreneur author Jonathan Hung. In a January article for the publication, Hung describes how a friend introduced him to a trading app.
Rather than investing, Hung had too many reservations about the company’s prospects. Ultimately, the trading app, Robinhood, went public, and Hung’s indecisiveness cost him a big payday.
This hesitation is seen time and time again, in individual investors, corporate leaders and even in portfolio managers. Everyone wants as much information as possible before taking a risk, but waiting too long often results in missed opportunities.
This is where the One Sigma Confidence rule kicks in. To be a successful investor, you don’t want to blindly speculate on things, but you also want to avoid waiting too long and missing the boat. If you invest with 70% confidence, it means you have enough evidence to determine that the odds are in your favor. Waiting for 90% or greater certainty most likely means the opportunity has shifted or vanished entirely.
Final Take To GO
If you want to be a stronger investor, don’t wait for certainty. Instead, aim for 70% confidence, act, then learn faster than those who are still waiting on the sidelines. Although this can be uncomfortable at first, it can give you an edge over those unwilling to take any risks.
That said, discipline still matters. Make sure to keep your bets in line with your overall investment objectives and within your personal risk tolerance.
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This article originally appeared on GOBankingRates.com: How This Uncomfortable 70% Rule Can Make You a Stronger Investor
