Here's a tricky question to ponder: Do investors get better or worse with age? Or, as two University of Notre Dame professors put it: "Does investment skill decline due to cognitive aging or improve with experience?"
I've encountered plenty of retirees who are very savvy about money. On average, I'd say they understand the value of savings and the dangers of debt better than most young people. I've met some who know more about the stock market than I ever will.
Yet I've also met too many others who have lost huge chunks of their savings by falling for bad investments some sweet-talking salesman convinced them was a sure thing. So what's the answer?
The two profs, George Korniotis and Alok Kumar, focused their attention on how aging affects the ability to manage a stock portfolio. They analyzed the portfolios of more than 75,000 investors who had self-directed accounts at a large U.S. brokerage firm from 1991 to 1996.
Here's what the professors found:
- Older investors took fewer risks. The stocks they owned were less volatile and more likely to pay dividends.
- Older investors traded less frequently, which other studies have found generally improves returns.
- Older investors were more likely to sell losing stocks to take tax losses, indicating they were more tax savvy.
- Older investors owned more stocks and more mutual funds, which could be a sign they understood the value of diversification.
But those smart approaches to investing weren't enough to give older investors an advantage over younger investors. In fact, the study found the returns of older investors were about 2 percent less each year, on a risk-adjusted basis.
Korniotis and Kumar concluded that older investors had more investment wisdom than those who were younger, but had difficulty applying it.
"The investing principles learned over several years are likely to reside in investors' long-term memory, which remains almost intact as people grow older," they wrote. "However, the effective application of those principles requires efficient information processing, which relies on investors' attentional ability and the efficiency of their short-term memory."
For example, older investors didn't diversify effectively even as they bought more stocks.
The professors found the decline in ability, measured by the reduction in investment return, greatest among those who had relatively less income and education or who lived in neighborhoods that were predominantly black or Hispanic.
Thankfully, they did not suggest that retirees give up on managing their own money, but rather that they should be aware of their limitations and seek advice from qualified financial professionals.
Financial author Larry Swedroe (The Only Guide to a Winning Investment Strategy You'll Ever Need) agreed, but he noted that the study found both older and younger investors underperformed stock market averages. "All investors would be better off if they stopped trying to outperform the market and simply accepted market returns by investing in index funds, or other passively managed funds," Swedroe said. "This advice becomes even more important the older the investor."
You can read the study online for yourself by going to the Social Science Research Network (http://papers.ssrn.com) and putting the name of one of the authors in the search field.
READER RESPONSE: Dunedin lawyer Eric Houghton says don't be too quick to close joint accounts when the other account holder dies, something that is recommended as a deterrent to identity theft by those who prey on the newly deceased. He says: "I always advise survivors to keep open one joint account in the decedent's name for at least six months. That way, if they receive a refund check in the decedent's name, they may deposit it into the account. Otherwise, such checks cannot be negotiated without opening a probate case."Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to email@example.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731
# # #