An experienced financial advisor can do more than just tell you where to invest your money. He or she can also prevent you from making bad investment decisions based on ingrained beliefs or behavior.
Experts in behavioral finance - the somewhat new but growing area of study that focuses on the psychology of investing - say such pre-determined factors as our gender, as well as the attitudes we develop about money early on in life, can have a profound effect upon our financial decisions. They can determine if and how much we choose to save, spend and invest.
Fox Valley area residents recently participated in a study by University of Wisconsin Professor Werner De Bondt that proves just how powerful of role such "inner forces" can play in the investment process. The study concluded that, left on their own, without the assistance of a professional advisor, most people have a tendency to make poor investment decisions. Many individuals not only lacked an understanding of basic investment principles, they also bought into certain investment myths - such as the tendency to "jump on the bandwagon" and buy stocks that are heading up and sell stocks that are headed down, when just the opposite is the tendency of the experienced investor.
Overconfidence also routinely leads to lousy trading decisions, according to Terry Odean, a professor at the University of California-Davis, whose most recent research into behavioral finance has sent a wake-up call to online investors. His conclusion: overconfident investors trade excessively, which hurts their returns. In addition, Odean found that investors in cyberspace tend to trade more speculatively - going on a hunch rather than following a solid investment strategy.
De Bondt's findings also prove that "going with your gut" doesn't pay. His Wisconsin study concluded that when making investment decisions on his or her own, an individual's intuition "often fools us and counsels the opposite."