Research Finds Mixed Results on How Aging Affects Investing Savvy

WealthManagement.com reports on research that has been done to assess whether the positive effects of wisdom gained from experience is greater than the negative impacts on investment behavior caused by the decline in cognitive skills as people age. Such research shows mixed results. Among the findings were the following:

  • Older investors tend to have more diversified portfolios and tend to trade less frequently — said to be a good thing — and they also make fewer errors such as selling winners too soon. They also tend to own mutual funds with lower expense ratios.
  • However, older investors who are less educated and have lower income are less adept in applying their investment knowledge. Their skill deteriorates noticeably around age 70.
  • Financial literacy declines beginning around age 60, but confidence in financial decision-making abilities does not. Researchers concluded that increasing confidence along with reduced abilities explain poor investment choices by older investors. This is exacerbated by a tendency for older people to reject evidence of their declining cognitive abilities and are thus not adequately aware of that decline.
  • The consequences of cognitive decline are likely to be worse for those with high initial levels of cognitive ability because they tend to directly manage their finances and, therefore, don’t seek advice due to their high level of confidence.

A key takeaway is that investors, advisors, and caregivers should consider the likelihood that financial decision-making skills will eventually decline. Planning for this should include creating powers of attorney for financial and health care matters with trusted family members or professionals. And these documents should be reviewed on a regular basis to make sure they are up-to-date.

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