A consequence of longer life spans is that we’re going to have to manage our affairs for a lot longer and make sure what we have outlasts us and not the other way round.
The good news from a study a few years ago is that older investors make better investors, because of their age and experience. The two economists found that investors between 50 and 70 are generally better at it than younger people. They’ve seen the market cycles before and so aren’t fooled by the latest financial crisis, whether it’s China’s swooning stock market or Greece’s protracted agony.
They don’t panic, but sit tight and ride it out.
The bad news is that after about 70 they lose their edge as their cognitive abilities decline.
The economists looked at trading activity in 78,000 accounts at a large U.S. brokerage house. They found that investors between about 50 and 70 were pretty good at it.
They tended to have many stocks which reduces risk. They owned higher quality shares and traded less often than younger investors which reduced their fees. They were more savvy about tax implications and more likely to follow rules of thumb that allowed them to buy and sell with less emotional interference,
But by their early 70s that edge was gone, as “the adverse effects of aging dominate the positive effects of experience,” the authors found. Their skill deteriorates and older investors earned about 3 to 5 per cent lower annual return than younger investors. It becomes harder to make decisions and incorporate new information. So they either do nothing or make decisions based on recollections that don’t fully incorporate how things have changed.
The implication isn’t that older investors should step aside, but that they would benefit from independent financial advice or someone they trust as a sounding board, says one of the authors, George Korniotis, a University of Miami professor.
They may also benefit from passive investing strategies, such as index funds or Exchange Traded Funds (ETFs) which allow them to invest without getting actively involved in trading.
“Perhaps a son or daughter who is a dedicated financial manager,” Korniotis said in an interview. “It doesn’t mean they should stop managing their financial affairs, just be aware that the stocks you own when you are 40 or 50 aren’t necessarily the ones you want when you’re 65 or 70.”
Korionitis says target date mutual funds, which I wrote about recently, are another strategy. These funds make investing easy by automatically adjusting your portfolio holdings to reflect your age and risk tolerance.
An English web site about psychology and investing, the Psy-Fi blog, visited the issue recently. Tim Richards pointed out that memory is notoriously faulty and what we often think we remember isn’t really what happened. Memory is context sensitive, so we try and fit new experiences into the framework of old and potentially faulty recollections.
“So memories of a horrific investment experience will trigger when a similar situation presents itself – the only problem being that history rarely repeats itself, exactly,” he says.
That suggests that as we age, relying on what we recall about past decisions isn’t safe. Richards says older investors need a method to keep track of things, not just recall. He says making better decisions can be as simple as writing down the reasons in a diary to keep an honest record of the details.
That would make sure you didn’t get lost in your memories and buy something you shouldn’t.
Sober second thought
If you’re thinking about making a change in your portfolio, here’s some advice from the BMO Wealth Institute:
List three reasons why that investment is a good idea, and three reasons why it isn’t. This will help you consider your decision from more than one angle.
By focusing on the pluses and minuses, you may be able to overcome the emotional swings that can keep you from getting the most from your investment decisions.