Lack of insight is a major target in the treatment of schizophrenia. However, insight may have undesirable effects on self-concept and motivation that can hinder recovery. This study aimed to examine the link between insight, self-stigma, and demoralization as predictors of symptoms and functioning. Insight, self-stigma, depressive and psychotic symptoms, and functioning were assessed among 133 outpatients with schizophrenia at baseline and 12 months later. The data were analyzed by hierarchical multiple linear regressions. More insight at baseline and an increase in self-stigma over 12 months predicted more demoralization at follow-up. Insight at baseline was not associated with any outcome variable, but self-stigma at baseline was related to poorer functioning and more positive symptoms at follow-up. More demoralization at baseline predicted poorer functioning 12 months later. Demoralization did not mediate the relationship between self-stigma at baseline and functioning after 1 year. Given the decisive role of self-stigma regarding recovery from schizophrenia, dysfunctional beliefs related to illness and the self should be addressed in treatment. Different psychotherapeutical approaches are discussed.