By Brett Arends, MarketWatch
And, alas, one thing that doesn’t decline is our confidence in our financial abilities.
Combining data from the continuing University of Michigan Health and Retirement Study with survey data from Consumer Finance Monthly, they find that “financial literacy” declines pretty steadily, along with many cognitive skills, from your late 60s onward.
But financial confidence…carries on about the same till age 90 or so.
It’s not a good combination. And it’s why so many financial swindlers move to parts of the country where there are lots of retirees .
“Investors who reach an advanced age of 75 and above experience much lower returns than younger investors,” they note. From a review of the academic literature, they conclude: “returns are lower among younger investors, peak at age 42, and decline sharply after the age of 70.”
Older investors pick worse stocks and are worse at market “timing,” they find. Research into individual brokerage accounts, they report, find that older investors are even more likely to jump on the market bandwagon than everyone else after it’s risen a long way, and more likely to bail when it tanks.
“Older investors appear to struggle with the selection of higher quality investments,” they write. “Investors older than 75 on average experience investment returns that are 3% lower than middle-age investors, and this return disparity rises to 5% among older investors with greater wealth.”
(Possibly related fact: Warren Buffett’s Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A -4.00% /zigman2/quotes/200060694/composite BRK.B -4.08% , which crushed the market for decades, hasn’t consistently outperformed the SPDR S&P 500 Trust /zigman2/quotes/209901640/composite SPY -2.44% since around 2002, when the great man entered his early 70s.)
It’s an uncomfortable and unpleasant truth that as we get older we get less mentally quick and less adept. This process may even begin as early as our 20s and 30s .
The good news is that for most of our lives we seem to gain much more from wisdom, experience and maturity than we lose to things like short-term memory. Which may, in turn, give us the wisdom, experience and maturity to kick back when we’re older, park our money in low cost index funds, immediate annuities and straightforward bonds, and stop worrying about the market.