How Investing Ability Changes With Age --blog post

[Derby]

https://www.silverlightinvest.com/blog/ ... hanges-age

Short and interesting:

However, “older investors have worse investment skill, where the skill deteriorates sharply around the age of 70.” In fact, “older investors earn about 3-5% lower annual return on a risk-adjusted return basis.”

And the take-away conclusion:

If there is an "investing prime," it appears to be between the ages of 32 and 56.

EEK, I'm over the hill already?!

[Sandtrap]

Interesting portal to a financial website.
Thanks for posting.

Yes. Cognitive Decline. Losing one's noodles , marbles, other things, is a concern.

Mentioned here: this book.
"What To Do When I Get Stufpid".
https://smile.amazon.com/WHAT-WHEN-GET- ... get+stupid

One of the strongest benefits of staying busy and in touch with the "Bogleheads.org" forum is to "stay the course" and "stay on point". A fairly good solution for cognitive declyine.

The other actionable solutions are: Target Date Funds, Vanguard VPAS, SPIA's done properly, Estate Planning done properly, etc.

However, Investing ability changes with age and also experience and financial maturity.
Witness "Sheepdog's" journey in his exceptional post.

Also, "Over the Hill and Dale".
j

[Park]

This is an important topic, especially on a board that looks favorably upon DIY investing and whose viewers are probably skewed towards those are at least nearing retirement.

"Compounding the cognitive aging issue is overconfidence.

Michael Finke, John Howe and Sandra Huston, authors of the study “Old Age and the Decline in Financial Literacy,” found a mix of overconfidence and reduced abilities explained the poor credit and investment choices made by older subjects. In their study, financial literacy scores declined by about 1% each year after age 60, but subjects’ confidence in their own decision-making did not decline with age.

Takeaway: many people have an investing blind-spot after age 60. They are more vulnerable to poor financial decisions, and aren't consciously aware of this."



Older investors have a double whammy. Unlike younger investors, the older investor very likely no longer has the option of generating income through labor.

A Bogleheads strategy is a good idea; the three fund asset allocation is a excellent example. An IPS and sticking to it is also another good idea. Both should mitigate the consequences of aging. And frankly, a simple strategy and and IPS make sense for the vast majority of investors, regardless of age.

But I think there comes an age when a DIY investor should get some financial advice. It may only be a second opinion periodically, but I still think it should be done.

What is that age? 60? 65? From what I can see, 70 would be the oldest age, at which I would recommend a DIY investor should stop being a completely DIY investor.

[Thesaints]

The statistics could only study those who are 70yo already. i.e. the same people who grew up mostly in a world with pensions and where financial products were only relevant for a few.
I wouldn't worry too much.

[Park]

A corollary of the decline in investing ability as one ages is that it may be better to learn about personal finance before the age of 60. How well will you learn, as you advance in years? I'm assuming that as you age, you will retain what you learned earlier.

[livesoft]

The major take-away from this is that I should ignore advice from anyone on this forum who is older than about age 55.

[Broken Man 1999]

I absolutely accept cognitive skills can deteriorate with age. What I need is a plan for the recognition of deterioration of my cognitive skills. And, it just so happens that very issue is on my list of questions to ask when I see my doctor Wednesday. Oh, I realize it might cost me a co-pay, should I venture out of the confines of the Medicare rules for the Annual Wellness Visit, but, it would be worth my $5. I cashed my Costco rebate certificate today, so I am flush for the moment.

Side note: Why do so many people use their rewards certificate to pay for Costco purchases, thus missing out on their 2% reward on their Costco CC?

In the meantime, back on recognizing cognitive decline, how do others handle this issue?

Seems to me that I might very well NOT think my cognitive skills have declined, so surely someone else should/must be able to recognize any slippage.

Our estate plan's intent for our finances could be very damaged by me, should I try to hold control too long.

Sincere question... I believe I'll google this.

Broken Man 1999

[afan]

I would follow these conclusions with caution if pay any attention to them at all.
The cognitive ability measure was a self report . Not a robust assessment of cognitive ability.

More importantly, they looked at the investment return of the portfolios held by investors. These seemed to include VERY few stocks (average 4, median 3).

Investors got credit for diversification for holding mutual funds and got credit for holding low cost funds. But not in the assessment of "Skill".

The database consisted of investors who traded common stock. Someone who held only mutual funds (this data was before the advent of ETFs) would have been excluded.

The authors assumed that the composition of a portfolio represented the individual investors' trading decisions. Someone who held mainly mutual funds, sold one common stock held, would be evaluated on the performance of such a portfolio as if trading and "investment skill" were driving the outcomes.

Someone who held a 2-4 fund index fund portfolio but never traded stocks would be excluded.
Someone who held such a portfolio and completed at least one common stock trade would be included, but the authors seem to ignore tax considerations. They credit investors for engaging in tax loss harvesting, but this is not part of their performance measure.

The authors have no reason to assume the accounts they saw represented the total holdings of the investors in the study. Investors who had defined contribution retirement accounts would not have those assets included in their portfolios or investment returns. Which means the authors don't know the Sharpe ratios or alphas of the investors porfolios.

An investor who held some low basis stock, and kept it to avoid capital gains taxes, would get no credit. The authors would evaluate the portfolio as if there were no taxes to be paid.

I concede this is a difficult study to conduct. They got data on a large group of investors. Unfortunately, that group is far from representative of investors as a whole. The data they have on these investors is incomplete and the cognitive measure seems far too imprecise to be useful.

Nothing in the study would support the notion that someone who buys and holds a 2-4 index fund portfolio needs consultation with an investment advisor as they age.

[Vulcan]

Takeaway: many people have an investing blind-spot after age 60. They are more vulnerable to poor financial decisions, and aren't consciously aware of this."

Another great reason not to tilt, and stick to a simple two-fund portfolio (VTWAX+VBTLX).

*I wish there was a mutual fund version of BNDW

[Vulcan]

The major take-away from this is that I should ignore advice from anyone on this forum who is older than about age 55.

Is this an advice to the rest of us?
How old are you, livesoft?;)

[Fallible]

I did not read all of the Korniotis and Kumar study, but enough to question how meaningful an "older" age range of 75-94 could be. It's a long way from 75 to 94.

Also, I think reading the study's Abstract is important vs. reading only what the blog's author wrote about it (boldface is mine):

Abstract – This paper examines the investment decisions of older individual investors. We find that older and experienced investors are more likely to follow “rules of thumb” that reflect greater investment knowledge. However, older investors are less effective in applying their investment knowledge and exhibit worse investment skill, especially if they are less educated, earn lower income, and belong to minority racial/ethnic groups. Overall, the adverse effects of aging dominate the positive effects of experience. These results indicate that older investors’ portfolio decisions reflect greater knowledge about investing but investment skill deteriorates with age due to the adverse effects of cognitive aging.

[Park]

https://www.dementiastatistics.org/stat ... in-the-uk/

This is prevalence rates of dementia in the UK from a 2014 publication. I doubt it's that different elsewhere.

In the link, no definition of dementia is given. My concern would be that their definition of dementia is not picking up milder cases of cognitive decline. Would those with milder cognitive decline still be able to manage their finances well?

I can only speak for myself as a DIY investor. Based on possible age related cognitive changes only, I think I should seriously consider getting a second opinion starting at age 70. By age 80, I should be getting a second opinion.

[livesoft]

The major take-away from this is that I should ignore advice from anyone on this forum who is older than about age 55.

Is this an advice to the rest of us?
How old are you, livesoft?;)

I am in my sixties nowadays. But yes, I have no problem if my advice is ignored.

[2015]

...

In the meantime, back on recognizing cognitive decline, how do others handle this issue?
...

Simplicity in all things. I have arranged my financial affairs such that I am able to pay more attention to my diet, exercise, and partnership with my medical providers than I do my investing, personal finances, and microeconomics. As such, I am always aware of all important health markers including cognitive abilities. Cognitive decline does not occur in a vacuum. Should tests evidence decline in any ability, then like everything I do, I would take proper action in advance of when needing to do so.

[Thesaints]

I don't think millennials will have any problems dealing with internet when they turn 70. Age impairs the ability of learning new things a lot more than the ability of retaining skills.
Most of the present 70 years old that formed the statistical basis for this research never had those skills.

[Dead Man Walking]

Please explain how this applies to an investor who chooses to invest in Target Retirement Funds in his tax sheltered accounts and Life Strategy Funds in his taxable accounts. I suppose that a few crazy old farts would stick with Life Strategy Growth for their entire life.

DMW

[Dandy]

I'm almost 71 and have noticed some decline e.g. making a few more mistakes with checkbook -- nothing major. Most people have very little financial education and tend to rely on friends, relatives, media or advisers on how to invest. When I was in college only a small percentage of women were business majors yet women survive men and inherit money management responsibility late in life. Prior generations had less ability to manage their "investments" and usually stuck to Savings and CDs. So older adults studied may not reflect the decline that future elders may experience when it comes to investment management. They should be better educated and more likely to use mutual funds, Target Date Funds, etc. then trying to beat the market by trading individual stocks.

Bogleheads usually deal with relatively few mutual funds and usually have had the benefit of the gentle guide that posts and replies provide. So, I would guess that forum members, for the most part, would retain their ability to self manage or at least not do much harm a bit later in life.

I do worry a bit about my non investment savvy wife and less than savvy children managing our nest egg. Using Target Date or Life Strategy Funds seem to be a likely answer.

[AtlasShrugged?]

What I need is a plan for the recognition of deterioration of my cognitive skills.

This. X1000

[AtlBoglehead]

Well, Warren Buffett and Charlie Munger aren't spring chickens, but seem to be doing quite well, thank you. And as far as the notion of sticking with a growth Life Strategy Fund for life, that's not too far off Buffett's advice to his family to adopt a 90/10 portfolio. At 77 I may need advice on technical stuff like estate planning, trusts, etc, but after years and years and thousands of hours of relevant study, I'm still quite capable of handling my investment activities especially since, in the words of one of Bogle's early "advisors," often humorously quoted by Mr Bogle himself, "Ain't nobody who knows nothing anyway."

[1210sda]

Jack Bogle was around 47 when he started Vanguard and the Index 500 fund.

Had he waited 8 years, we probably wouldn't have listened to him.

Sorry Livesoft, at your recommendation, I'm going to have to ignore all your advice.

1210

PS: Just kidding, I'll continue to listen to LS advice. Once he turns 70, however.........

[Cycle]

No wonder there are so many reverse mortgage and liberty mutual life insurance ads during Murder She Wrote

[backofbeyond]

This subject really hits home for me and I can certainly identify with the fact that as we grow older we face a real dilemma.

My father was a self made millionaire by the time he was in his mid 30s. Did it via Real Estate and owning small businesses. Very savvy businessman. For 30 years he told me that when the time came, he would hand over his financial reins to me and go into a "old folks home". We had a Trust set up so that 2 independent doctors would have to determine him mentally unfit for it to happened without his consent.

At age 78, he thought black birds were stealing his brief case and important documents. He also cashed out all of his I Bonds because he believed the Gov't was going broke and hid tens of thousands of dollars in his basement. It continued to get worse. At this point he did allow me to take over his finances. Thank goodness. By age 83 he thought my cousin was my step sister (I don't even have a step sister) and had several car wrecks (that he hid from us). So we had two independent doctors determine that he had dementia. He knew something was up, but having always been his "own man" he refused to move into a care facility. So we had a home nurse/caretaker come in. At age 85, he decide enough was enough and took an over dose of Tylenol. Fortunately the family was able to gather around before he passed.

This of course had a profound effect on me. I've struggled with how to protect my wealth from my future self and continue to research how best to do so. These kind of posts help.

[Watty]

Please explain how this applies to an investor who chooses to invest in Target Retirement Funds in his tax sheltered accounts and Life Strategy Funds in his taxable accounts. I suppose that a few crazy old farts would stick with Life Strategy Growth for their entire life.

DMW

There is a risk that they could get one of those "free lunch" offers and get taken by some financial "advisors".

A lot of telephone scams are directed towards older people who may not be as capable of realizing that it is a scam.

[garlandwhizzer]

The relationship between age and investing skill is highly variable from one investor to another. Increased age can mean either increased experience and knowledge of investing which in theory should be a positive or it can mean declining cognitive skills or emotional lability that would be a negative. Warren Buffett is either 86 or 87 and I don't think that many would say he lacks investing ability. On the other hand there are many less than 70 with dementia who require round the clock care just to meet their daily needs. The problem is when your skill declines will you recognize it sufficiently to transfer investing decisions to a trustable and competent individual or firm. Finding competence and trustability at that point can be very challenging. This is one benefit of an annuity or other guaranteed income stream.

Garland Whizzer

[jacksonm]

The guy at personal capital who has been calling me must have read this article or one like it because that was his sales pitch for taking over the management of my portfolio. It just so happens that I will be turning 70 in a few months.

I've been using the same investment strategy for about the last 11 years and see no reason to change because it served me well leading into retirement. I don't see where "investing ability" even matters because I didn't have all that much to start with. I just picked a strategy shown to work and stuck with it. Paying some young whippersnapper .89% of my portfolio every year to manage it when I am hardly paying any fees at all strikes me as one of the worse investing mistakes I could make at this point and I politely told him as much.

[JBTX]

I'm skeptical of such recommendations. Assuming that someone has a Boglehead level of knowledge and is not suffering from dementia or alzheimers I see no reason to see why you can't continue to do so. The caveat being you stick with something like a target date, 3 fund etc.

I am just skeptical about financial advisors period. Finding a good one that is truly aligned with your interests, and follows a Boglehead philosophy is hard to do.

[Earl Lemongrab]

I was a terrible investor as young person. I didn't get smart until age 50.

[cheese_breath]

Using a three fund portfolio doesn't require any skill.

[Doom&Gloom]

In addition to the excellent critiques offered by afan upthread, this was a cross-sectional rather than a longitudinal study. IOW it was a current snapshot of different age groups rather than following the same group over a period of time.

There are any number of factors that may account for the differences among age groups in this study.

[NotWhoYouThink]

I would follow these conclusions with caution if pay any attention to them at all.
The cognitive ability measure was a self report . Not a robust assessment of cognitive ability.

More importantly, they looked at the investment return of the portfolios held by investors. These seemed to include VERY few stocks (average 4, median 3).

Investors got credit for diversification for holding mutual funds and got credit for holding low cost funds. But not in the assessment of "Skill".

The database consisted of investors who traded common stock. Someone who held only mutual funds (this data was before the advent of ETFs) would have been excluded.

The authors assumed that the composition of a portfolio represented the individual investors' trading decisions. Someone who held mainly mutual funds, sold one common stock held, would be evaluated on the performance of such a portfolio as if trading and "investment skill" were driving the outcomes.

Someone who held a 2-4 fund index fund portfolio but never traded stocks would be excluded.
Someone who held such a portfolio and completed at least one common stock trade would be included, but the authors seem to ignore tax considerations. They credit investors for engaging in tax loss harvesting, but this is not part of their performance measure.

The authors have no reason to assume the accounts they saw represented the total holdings of the investors in the study. Investors who had defined contribution retirement accounts would not have those assets included in their portfolios or investment returns. Which means the authors don't know the Sharpe ratios or alphas of the investors porfolios.

An investor who held some low basis stock, and kept it to avoid capital gains taxes, would get no credit. The authors would evaluate the portfolio as if there were no taxes to be paid.

I concede this is a difficult study to conduct. They got data on a large group of investors. Unfortunately, that group is far from representative of investors as a whole. The data they have on these investors is incomplete and the cognitive measure seems far too imprecise to be useful.

Nothing in the study would support the notion that someone who buys and holds a 2-4 index fund portfolio needs consultation with an investment advisor as they age.

Other than that, did you see any issues with drawing conclusions about boglehead kinds of portfolios from this study?

Seriously, thanks for looking more carefully at the methodology and basis for conclusions.

Doing the same thing you've learned to do well seems to work pretty well as you age. Learning new things, or trying to do things you've never really mastered is more difficult. Probably if you start out simple and keep it that way you'll be fine even when you are no longer under 60.

[clip651]

Using a three fund portfolio doesn't require any skill.

Ah, but it does require skills, as do other simple plans. I'm not picking on you, Cheesebreath, but on the general idea several have expressed that folks will be fine with a simple plan, and/or will know when they are having trouble. (And I do agree that simpler plans are better and easier to manage than complex ones - no argument there.)

The investor needs to remember all sorts of things - which company holds my investments? How much do I withdraw and when (automatic or manual, from which stocks, bonds, or CDs, etc)? Did I take my RMD already this year? Which papers are important to keep for tax preparation? Which company is my bank? How do I pay my bills? (Autopay helps, but isn't foolproof, it still needs some monitoring of account balances and checking that things are coming and going from the account appropriately. And autopay doesn't work for everything.) Is the person on the phone really from my bank, or a scammer? Did I call them, or did they call me? What is my account number, where do I find the paper that has that on it? Who else has permission to access my accounts (e.g. family members on joint accounts, people with a POA, etc)? Should I sign this paperwork that is in front of me? Who called earlier today?

Believe it or not, the ability to keep track of such basic things can slip without the person even really realizing they are having trouble. I have seen it happen. These folks seemed to still be functioning pretty well, but if you watched more closely, they were having difficulty keeping things straight that used to be no issue for them. Later as things became worse, it was more obvious to observers. But even when things are more advanced, the person with memory loss or dementia doesn't always remember that they have issues remembering things, or else can't think straight enough to realize they aren't thinking straight.

Dementia varies quite a bit, and can come on subtly or not so subtly. The person may realize they are having trouble, or not. And it won't happen to everyone. But it is common enough in people as they get older, that it is good to have a plan in place, just in case.

If it's an option, having one or more (younger) trusted family members involved in one's finances so they are able to learn the ropes before it is needed, and are available to step in and assist or take over later if needed (with appropriate agent authority, POA, joint accounts, etc as needed) can be a big help. Of course, this requires a lot of trust with the family member(s). If trusted family members aren't available, I'm not sure what good options are available, I'm interested to read other possible solutions to this issue.

cj

[Katietsu]

This study may have the limitations outlined, but I believe that there should be more education on cognitive decline. Yes, everyone has their own “glide path” and individuals certainly start at very different places. But dying young is the only way to completely avoid the effects of an aging brain.

In my opinion, the inability or unwillingness to recognize developing issues is the greatest danger. My observation... at forty, you know whether or not you have seen a certain movie...at sixty, you believe your spouse when they tell you that you have already seen that movie (even though you do not remember it)...at eighty, you insist you have never seen the movie before (even though your daughter tells you that you all watched it previously).

[UpperNwGuy]

Using a three fund portfolio doesn't require any skill.

True, but I plan to evolve into a two fund portfolio when I reach my 80s. International will be the one to go.

[jacksonm]

But dying young is the only way to completely avoid the effects of an aging brain.

Jack Bogle and our own Taylor Lattimore give me hope that this isn't necessarily true and I don't think it is, at least when it comes to investing.