Cognitive skills and financial choices
How does your ability to make financial decisions change over time?
One research study suggests that, across the population, financial skill follows a hump-shaped pattern. In our youth, we start with low levels of financial knowledge. Over time, our ability grows through experience. However, as we age, our cognitive faculties begin to decline. Over time, the decline in ability outpaces the growth in experience, and as a result our net ability falls. Hence the idea of a hump-shaped curve: from a low in youth, to a peak in middle age, to a slope downward in our older years.
What’s the magic turning point? The researchers estimate age 53 as the age of peak financial decision-making. Coincidentally, I just turned 52—and so if I am like the study averages, I can anticipate another year of strong financial decision-making, followed by a slow but inexorable decline.
This question of cognitive skills is one of the more vexing questions we face in an aging society. Of course, there will always be a large cadre of older individuals who are able to make informed financial decisions on their own. Yet there is an expanding group of older adults unable to comprehend all of the details needed to purchase modern financial products. As the researchers note, the prevalence of dementia doubles every five years after age 60. What’s more, older decision-makers are affected by milder cognitive difficulties not associated with a formal dementia diagnosis.
At a social level, it’s hard to imagine what the path forward is on this issue. Do we create a set of ultra-simple financial products through regulation? But not everyone is impaired, and some households will want to use sophisticated financial tools. Do we require everyone to complete a questionnaire about his or her skills before buying complex products? That’s hard to administer—and hardly fair if it targets only older decision-makers. Do we impose higher standards of conduct in the case of impaired decision-makers? But then how do financial providers know who is impaired, and isn’t?
Whatever solutions emerge, the question of cognitive skills is not going away, especially in a globally aging world. The financial world is only growing in complexity. Think about the financial decisions that older households face in terms of loans and credit, investments, insurance, reverse mortgages, supplemental health insurance, and so on. (And it’s not just the financial world—have you bought a new car lately?) If that complexity poses a challenge for inexperienced young decision-makers, it is certain to prove daunting for older households struggling to make informed choices.
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Given that we do have a decline as we get older, what does this mean in terms of the mutual fund managers that we trust our lives to?? Should we base some of our decisions on choice of mutual funds on the age of the manager??
Okay, I read the study– yes, at age 61 I can still do that. While the presentation of the data was interesting, most revealing was the frank discussion of the feasibility of remedies various, and in fact whether any remedy is actually needed. Ask Maurice Greenberg, 84, if he wants any decision-making assistance (I read today that he is busily assembling a new entity to compete with his former company, AIG).
Will people make mistakes? Yes. Should we try to insulate all people from all mistakes? No. Catch the crooks who prey on older people and give them nice, high-profile long sentences. Maybe give seniors a magnetic card with some essential points (don’t buy anything from someone who calls you on the phone, don’t watch late-night infomercials, etc); we can stick them on our fridges or TVs.
Beyond that, Vanguard should continue and maybe increase its educational articles and podcasts. Vanguard can help keep us up to the mark.
I am 78 and have done pretty well, but I seem to have lost interest inthe stock and bond markets and am doing nothing . How can you help.
It seems to me that the best thing to do for older people is also the best thing to do for everyone: provide clear, simple documentation with risk ratings for each product. The more tools you can give people for assessing their personal situation vis-à-vis the proposed investment, the better.
This idea just came to me, but you could think about a tool that draws on crowdsourcing. What if people were to input their experiences with particular investments, with the tool presenting information based on that data? (Maybe this is done in some form already, but probably not with average investor participation.) Just a thought, anyway.
Perhaps a self administered tool or structure similar to the health care Advanced Directive would help draw the aging investor into previewing with his family not only his or her estate planning intentions but also the asset preservation goals and methods to be employed by the nominated in advance guardian.
Have you ever looked at the choices offered in Medicare and Medi-Gap policies?
Even Einstein would be confused.
Dear sir, you may be right on average, but some of the best fund managers are senior citizens. What about Wellington’s geezers. They do okay.
10/31/09
It would be interesting to see the W-2 of the 52 year olds and to know what their bottom line will be when they are 80!
Cognitive skills decline – for some ! Many of us in our 70s have increased our understanding of financial markets – have more time to follow market movements – watch CNBC / BLOOMBERG – read BARRONS, WSJ etc. And we know who are the key voices eg Doug Cass, Denis Gartmann, etc.
I know I am making better decisions than ever before. Wish i had this much knowledge when I was 40 – 50 – 60 !!!
Over the years I have learned little by little about investing. I am recently retired from 31 years of teaching and I have more time to investigate. I am truly thankful the little bits of investing knowledge are now providing me with comfortable investigative skills.
Age and experience have truly provided me with small but steady increments of success.
I am a 65 years old woman, getting forgetful at times. Thinking to have my son to take care of my modest portfolio but heis not interested in finance.How about switch those stock funds into simple taxfree bond funds?
What is the remedy for not needing my mandatory “rmd” distributions? Where to invest them?
Interesting that the guy deciding 52 was the hump and all old geezers are unable to manage their finances happens to be 51.
I know dozens of 40 to 55 year olds who will now have to put off retirement until 90 and I don’t know anyone over 65 who lost even half of his or her assets.
I will turn 84 this month. My assets are about the same as two years ago even though I move between 40 to 60% stocks and bonds. I believe the hump is around 86.
Mr. Utkus,
I am 76 years old and feel strongly that my investing success which, of course, follows closely with my comprehension of financial matters, reflects not only my understanding of financail matters but a patience with my investments. The combination has enabled me to suffer far less than most individual investors during the 2009 melt down. In my mind I see the factor of aging and ability to comprehend financial matters as more a function of how active (mentally) the person is and his use of personal computers to maintain mental sharpness. Ask John Bogle just how much his mental abilities have deteriorated since retiring from Vanguard. (You might want to ask him over the phone rather than in person.)
I realize that your presentation is based on surveys of large numbers of investors while my thinking reflects only my own experience.
Thanks for listening.
Is Vanguard trying to sell a service based on this “one research study”? Age 52 sounds to young to be on the downward slope.
Would like an example of diversication for age 78 plus. Is there a place this can be found? I am an invester in Vanguard and have been satisfied with my investment results. However would like some input without paying the asking price for evaluation of portfolio. thank You.
Given our culture’s history of rushing to judgment based on studies with small Ns and unrealistic situations – you know, the ones that are on the newspaper’s first page and involved 12 subjects who were college sophomores – I would like to know more about how the conclusions were reached, e.g., was speed involved in the score? (I know: I should read the complete study…) I think that there are things that we younger-older ones (69, here) can do if given the time we need to do them well. I would hate to see the rising of cultural pressure to surrender our decision-making powers, based on whatever. And, of course, if there becomes pressure to do things like that, you can be sure there’s a money-making motive involved. There are lots of ways we can be helpful to older folks, should we choose to.
I am 59 years old and retired not by choice. My best investment years were after the hard lessons of the easy money during the dot com years. It was easy for awhile and hard after realizing buy and hold was not the best strategy for this period I realized that this was a trading era not an investment era. I also learned that I was not the expert I thought I was. I have since recovered and will share most of the sum I have accumulated was through value stock buy and hold.
I like your two comments from November 1. I am a 78 year old retired professor of physics. I have more time and more interest in finance than I did when was too busy with work. I also have the luxury of not having a 40 year time horizon to worry about. I find the general tone of the article condescending, and basically wrong. Whatever loss of cognitive skills there might be is often made up for by better understanding. It was the younger people who got hurt the most last year because they had never experienced that kind of market.
I am a 78 year old man, fairly comfortably retired for 16 years. Without the help of high income or windfalls. Planning ahead, avoiding debt, and living within my means got me here. Lessons learned along the way regarding investments were really simple rules:
Any deal you don’t understand is probably bull.
You are probably not going to beat the averages.
Getting interest is good, paying interest is bad.
At 66 I totally agree with Mr. Utkus, Unfortunately – being newely retired and having watched my IRA drop considerably, I only have those remaining cognitive skills. On the bright side, being a chemist I never understood a darn thing about investing or the economy; so now I am reading books on the subject, subscribing to WSJ,Morningstar, Financial times, and the Economist. The most baffiling part is the termonology – but I’m getting there. Since I had no financial teaching till now, I’ll have to use my existing cognitive skills to create a “mini hump” I wish I could find a good course to take with a real teacher and other semi-neophytes to help me up the curve before it’s too late!
I’m a financial planner (fee-only, so please don’t lump me in with those “advisors” who love to sell products to earn fat commissions), so keep in mind that I’m writing from that point of view here.
While there are more sources of information now for people, that doesn’t necessarily make it easier for people — especially seniors — to make prudent financial decisions. I think that so much information can make it more confusing, not less, to figure out the right things to do.
Everybody’s situation is different, and many aspects of a person’s financial picture should be considered when determining investment decisions, etc. One of the people who commented before me asked whether she should switch from stock funds to “simple tax-free bond funds”. This is the kind of question that worries me about senior citizens making decisions for themselves. So many factors must be considered before determining whether a tax-free bond fund makes sense — tax bracket, desired maturity, need for safety, need for portfolio growth to outpace inflation, and more.
I think that many people, especially seniors, would greatly benefit from the ongoing advice of a trusted financial adviser — not the “fee-based” or all-commission advisers who just want to sell annuities and other investments, but fee-only financial advisers who always have a fiduciary responsibility to put their clients’ best interests first.
As an expert in the dementias and having a master’s in gerontology my comments are as follows.
1. Diminishing cognitive skills ARE NOT normal aging. It is a result of a disease process. Don’t label older adults as normally becoming cognitively difficient. It’s just not true.
2. Those with diseases that reduce cognition typically don’t understand that they have cognitive limitations. It’s the nature of the diseases to typically take away the ability of self awareness early on in the diseases.
3. If a person has a cognitive disease they begin to not be able to understand or use educational materials and/or tools like those who are cognitively intact. They can and do misinterpret or incorrectly recall what they’ve read or learned. That’s early on, and it goes down from there…
4.Should we insulate all people from all misteaks. I agree to the previous answer of NO. But some people perhaps should be insulated, i.e. those who are cognitively impaired. In my practice I have seen far too many people do things with their finances under diminished cognition that they would havre never done before their diseaeses appeared.did they discuss their financial dicisions with their children or a financial advisor? No. Finances are too private a thing for many elderly.
5.Perhaps having to pass a basic cognitive test would be useful on a number of fronts.
I’m a 76 year old woman in the same boat as the 65 yr old woman poster. My son isn’t interested either. Is there anyone available at Vanguard to advise those of us with modest portfolios and, yes, what about “simple taxfree bond funds?”
Declining skills might be offset to some degree by increased effort. As people mature, they often have more discretionary time available to devote to such issues. So it is the net effect that matters.
I am in my 70′s, with good money management skills. My wife and I were reinvesting our dividends from stock market funds into bond funds, to decrease our exposure to stocks, without making exposure to more taxes.
When my wife died a faceless person from Vanguard called and said to me, we are changing your allocation to reinvest dividends into the stock funds. I asked her why she was doing this, she replied to help the executor. I told her I was the executor, please don’t do it. While she gave me the impression, she told me she was going to make this change anyway.
I don’t know how old she is, but I presume she is not rated as a person with declining cognitive skills, like me.
I am an 80-year-old man who depends on his investments for his (and his wife’s) retirement. I am aware of some decline in my general abilities, but think (rightly or wrongly) that I’m still competent to make investment decisions. I’ve discovered over the years that I’m good at calling major tops and bottoms but poor in trying to trade on shorter timeframes. I saved myself from major losses by getting out of the stock market in 2000 and 2007. I depend a lot on the opinions expressed by Bill Gross and the other Pimco people to make my decisions about investing (although I’m a Vanguard rather than a Pimco customer). It seems to me that investment products such as Vanguard’s LifeStrategy and Managed Payout funds are good choices for seniors and others who don’t feel competent to make their own decisions.
Oh my God – I’m going to have to sell my Berkshire Hathaway stock – Buffett is over 53 years old! At his age he just might just take some of the company money and go buy some trains to play with.
Senility and elderly are not synonyms. Just as the young can be foolish and middle age can be complacent the elderly can be impaired. So which group do we rescue
I am a 53 year old man and have been investing with Vanguard since 1986. I think my financial decision-making abilities have improved a little every year. This article make me a little sad that I may be at my peak and it may be downhill from here. Maybe it’s time to retire and start spending – while I can still decide what to spend it on!
I’m now 71 and in good mental and investment shape (I think!), largely in stock and bond index funds. But I also run several significant family member accounts, including one for a sister with Altzheimer’s, and I’ve decided to shift those to other, younger family members when I hit 75, just to be cautious.
The article tells us that in youth our skill is at it’s start, and that age 52 it peaks and then declines, but how fast? What older age is equivalent to, say, age 40? age 20?
There seems to be some vague claims in this article, but I’d really like to see the Curve plotted on a labeled graph.
I actually really think this article is pertinent, even though 53 is a bit early to worry about this. Frankly at any age, products that don’t require monthly management are attractive to everyone. I have purchased a 529 product for my grandchildren, for example, which I will not manage…it’s designed to be aggressive and become less so between now and the boys’ 18th birthdays. I want to make the contributions but I have enough on my mind to worry about the risks and benefits. This isn’t age-related…it’s a market niche for those of us who prefer to spend our extra time in other ways!
I’m more afraid of our government which is being run by people with ecomomic dementia than I am by the mistakes I might make as an elderly gentleman.
“Making financial decisions” in the context of this article seems to imply some ability to try to pick stocks or otherwise beat the market. I am convinced however, despite some recent articles to the contrary, that the intelligent thing to do (unless you are Warren Buffet) is pursue asset allocation and Vanguard’s advice for same. As for dementia, I see little hope as America descends into obesity-driven bad health. Invest in the health-care industry?
I am 72 and feel that I am doing better at financial management than ever before. Hope it isn’t a delusion.
Sounds like the gentleman underestimates the abilities of older folks. So much variation across age groups exists in terms of knowledge, time available, and energy for investing. We all know sharp retired folks who use their new found time to investigate funds and market conditions.
This past year has demonstrated that what’s needed is knowledge about investment much earlier in life. Dimentia is not a problem most of us face.
At 85 I feel more knowledgeable re: personal financial planning than ever before. The events since 2006 and causes of the debacle were fascinating to follow as is the apparent beginning recovery. I continue to count on the “good ones” (equities) I picked to come back. Sold very little and presently down about 30% overall but with bond funds available to sell and some dry powder(cash) too. Hope I shouldn’t be cutting out paper dolls rather than continuing to make investment decisions !
This topic will gain priority over time as peoples retirement incomes are now (via 401K type retirement plans) more dependent on individual decisions. This is of course in stark contrast to the defined benefit pensions of the recent past.
My main concern is that women generally outlive their husbands. I’ve numerous personal experiences with widows left with sizable 7 figure portfolios. The widows generally have little to no investment experience and are frightened at the prospect of managing money. They are often easy picking for financial planners who do not always have the clients best interests at heart.
Bull chips. Show this article to Warren Buffet. I hear he us doing just fine He could buy Vanguard. I am 70 and I am on top of my mental game.
thank u for the info, it is time to think about this.
There must be other factors that are much more prevalent than age. Otherwise, how can you explain circumstances that would cause many people, who might be around 53 years of age, to spend over $24,000 to contribute $4,500 for auto purchases or spend billions of dollars to create almost no jobs.
I got into investing at the age of 63 when I became a widow. Have had to learn a lot in the last 15 years, but I’m understanding more each year. Just don’t ask me to do too much on the computer. I’m lucky I can access my account. I’m on the downward curve of the “hump”, but I’m going down with my brakes on so I don’t slide too fast! One can’t ever stop learning.
I was forced to retire from my career as an airline Captain when I was age 60 even though I felt that I could continue for many more years. Now, at age 76, I realize that there was a point somewhere between age 60 and age 76 that I needed to quit. The problem is finding the proper age since it is different for each individual. By managing my own financial matters I now have a modestly large estate and have done estate planning with a lawyer to insure that my wife and children are provided for. This is my problem. How, during my declining years, do I insure that I don’t do something stupid enough to mess the whole thing up? During the years I have consulted a number of financial planners, all of which wanted to sell me annuities or load funds, neither of which I feel is appropriate for me. Now, as with my airline career, I would like to continue doing it my self. How do you know when to Quit?
This is a difficult topic, and very worthy of honest discussion. Thank you.
Investors already complete surveys to assess their risk profiles, and advisers are supposed to recommend products that are suitable to those risk profiles. The concept of suitability should also include a client’s abilities. Perhaps the risk surveys could be expanded to provide a broad indication of the client’s financial sophistication and decision-making skills.
And yes, I do think that an adviser should be held to higher standard of conduct when working with a less-capable person, regardless of the client’s age, education or net worth.
I am 88 years of age; read the WSJ daily; enjoy your monthly newsletters. I feel pretty good in explaining the current financial dillemma. Pls continue your newsletters. I am amazed at the imaginativeness of the current flock of negative financial wizards. Pls present features in your Newsletter about scamsk, their attractiveness and how they work.
I don’t doubt that cognitive abilities decline over time and that 53 years of age might be the beginning on average. But what about guys like John Bogle or Warren Buffett. I suspect their cognitive abilities are less today than they were 30 years ago, but they’re still well above the average of most of the “wizards of Wall Street.” They could have lost 50 percent of their abilities and still be 25 percent ahead of the vast majority. Unfortunately, I can’t say the same for myself. I’m 56 and have noticed a significant, albeit may not substantial, decline over the last 3 or 4 years. Although, congestive heart failure, not age, may have something to do with that.
Read the research on ways to improve cognitive skills regardless of age. Age alone is not the key factor. Diet, exercise, mental and problem-solving activity (yes, just as humans need to physically exercise in order to keep their bodies from freezing up or crumpling, we have to exercise our various mental capacities in order to keep them healthy) are key.
As for the age of the fund managers — to me it is less important than their mental acuity and ethical standards. I distrust the greed-heads and simple-solutionists, whatever their ages. So far, the Vanguard family of funds has seemed, in general, to avoid the worst problems of these two groups. For that, I thank and continue to trust them. It’s not about age.
The thing about studies like this is that it is too easy to draw the wrong conclusions. The cross-sectional study finds that the peak age, on average, is 53. That does not mean that anyone turning 53 is starting to lose their cognitive abilities.
The graph in the study showed the benefits of experience rising sharply in youth, then leveling off, which seems reasonable. Cognitive abilities, measured by word-matching and similar tests, declined in a basically linear pattern, producing the inverted U shape. Their conclusion is the team of 53-year-olds, at the top of the U, would outperform the teams of all other ages.
This study emphasizes dementia, which is more prevalent among older adults, but does not mean it will set in for everyone starting at age 53. It also doesn’t factor in the high-risk mindset of the young. It is impossible to draw a conclusion about the future of any individual from this. The writer is 52, but may have his best decade ahead.
I am 58, female, and have several older, dear, widowed friends, one 80 and one 92. Both of these women were professionals, intelligent and well educated. They still maintain an active social life, and enjoy all sorts of arts and cultural activities.
However, I see the gradual declines in their abilities to remember and learn new things, and it is sad as they confess to the confusion and bewilderment of coping, sometimes with just keeping a checking account straight, let alone a spectacular market collapse that put their once well-planned finances into disarray.
I wonder if the best course of action might have been to pick a trusted financial administrator at an earlier age, who would be charged with paying bills, getting taxes done, and in general, gradually assuming more of the burden over time.
In reality, these friends would be better served with annunity income (rather than returns on a portfolio) that could not be lost; and then the administrator would handle the day-to-day cash management that is now causing them so much worry. Any of us might be in their shoes some day, although we all want to vigorously deny it.
I have a strong belief that cognitive skills are just part of the skill set needed for successful investing. Emotional skills are at least as relevant as intellectual ones, if not more. Does Vanguard have studies on how issues such as overconfidence, loss aversion and money illusion evolve as investors age?
Why has nobody mentioned youth’s lack of ability in these comments? The “hump” has an upward slope and a downward slope. If we propose to do something for people at some point on the advanced-age downslope, shouldn’t those below that same point on the youthful upslope get similar guidance/regulation/assistance/restrictions/et cetera?
Yes, youth have more time to recover from a loss, but consider that any loss while young is also a loss of the growth that another 30 to 50 years would have brought, too. A loss while young is “compunded” by the lost opportunity to grow that investment over subsequent years.
I ha hoped that this might be a more general comment on investing. Do cognitive skills help at all?
I index broadly and and have never thought that I or anyone else could consistently do better.
Am I wrong?
Question: Have you considered offering a fully diversified fund?
Individuals will certainly vary, but consider the implications for society as a whole. My grandfather and my father had pensions. These were, once they retired, a permanent source of income to cover basic needs of shelter, food, transportation. And they did not have to make any decisions or have any financial skills in that system.
Now consider my generation — there are no pensions, only IRAs and 401(k) plans. While people may do reasonably well in making financial decisions with them while they are young, once they retire they have significant decisions that must be made: what to sell, tax consequences, mandatory distributions, stocks versus bonds, and more. And this just to provide a steady source of income to live off of. No matter how well or how badly my father did with his investments, he still had a steady income from his pension. If I make the wrong decisions, I could lose everything that I have accumulated for retirement.
And I may well not even know if I have made a good or bad decision (or even know that I have made a decision). A previous study showed that incompetent people do not know they are incompetent.
My solution is to use some portion of my retirement savings to buy an immediate fixed annuity — basically to try to provide the pension my work does not provide — with the aim of providing a fixed, steady source of income to cover my basic needs. Then I can screw up everything else and still survive, independent of my failing financial…
How is financial intelligence measured at any age? If there is a way to measure it, there is a way to determine decline. It seems some seniors think they are making good decisions, not even recognizing the decline in themselves .
I’m Sure Warren Buffet would be surprised to know he has passed his prime. So would several million other admirers.
At age 67, my present age, I think I’m beginning to have some greater understanding about the stock market; after remembering month after month of paper losses, during the worst recession since the depression. I now know that I need to invest more conservitively in order to be financially secure in my semi-retirement. I’planning to sell my largest mutual fund which has been operated by unethical people. Many in Wall Street were greedy and probably some still are. —-Check out Lies About Mutual Funds to have your consciousness raised. The writer is out of touch with the understandings of senior citizens. Thank God, I’m doing pretty good right now.
The suggestion is most timely for me as I embark on the second quarter of my eightieth decade. I’ve begun to realize that I’m not able to do justice to a portfolio of only eight funds held in a Roth. Just this week I’ve consolidated to three index funds. This reduction correlates with less feelings of stress. How it affects the bottom line remains to be seen.
So Warren Buffet’s abilities have been declining for the last 26 years???
This is very sad. How much of what goes wrong for the average older person is really due to a serious decline in cognitive abilities versus what someone has done to confuse or intimidate that person? I have read stories about seniors who were convinced their relatives were trying to steal their money and continued making bizarre financial decisions until someone finally went to court and had them declared incompetent after having lost a significant amount of money in the mean time. However, what is much more common is that a senior who would have left their money alone and just continued to withdraw the same amount every month is tricked into withdrawing a large amount and giving it to a scam artist. Either the older person is made to believe that something bad was going to happen to their money and this new “friend” was coming to their rescue or that this new person in their life was sharing a special opportunity with the senior. Part of the problem is that current seniors are way too trusting. I wonder if this will start to change as the elderly population shifts more toward the post war/boomer generation.
As I read, I was nodding my head in agreement with the author, because at 75 I have to admit some mental slowdown. Then came the comments of indignant seniors whose minds, they feel, are full speed ahead. How about some sophisticated financial instruments and some simple, basic ones to suit both populations? My vote is for simplicity! I’ve had enough of complicated electronics, phones, computers, microwaves, etc., even language, that make me, with five years of college education, feel like a dummy.
I took the time to read the full article and am fairly convinced that the authors have not done much more than act like the proverbial blind man looking at the tail of the elephant who decides it is a skinny animal. I have an 85 year old father who is being deluged these days by unscrupulous vultures trying to separate him from his money. However their appeals have nothing to do with analytic function; they prey on older people’s emotions, not their logic. The sales people act really nice, they tell warm stories about their parents and their children, they fake concern and empathy and then when they have gained the elderly person’s trust, they prey on their fears of running out of money, of financial ruin, of being a burden on their children. They promise them they have just the solution to the problem and that it worked for their dear old parents and they just want to share it with everyone else because they are so good hearted. (Vomit)
It is much easier to explain any “U” shaped age effects by the affective side of the mind, not the analytic. Young people haven’t been burned enough yet to realize how suspicious they should be of sales people, so they fall prey to one set of stories and emotional appeals. Older people, for some inexplicable reason, become too trusting again and are taken in by a different set of stories and emotional appeals.
I plan on remaining cynical and suspicious of people selling financial products until the day I die. It’s your only real…
I think Vanguard has answered the “what to do” question in its article about retirement investing: simplify your portfolio”.
At 59, I have been responsible for all investment decisions for our family. I agree that your study may make some valid conclusions about cognitive abilities as we age. Also, people generally make investment decisions on what they know. Often with their very real bias toward asset allocation, sometimes without recognizing existing or changing market conditions. It also should be noted the very real Sea Change in markets that we see today due to the political and economic storm we are currently living through. All of these factors makes investment decisions very tough for young and old alike. It all boils down to our own individual judgement, and talent as investors. Plus our ability to realize if we have the skills to recognize how to handle investment decisions rationally and wisely for our individual or family needs.
I am 75, and while my cognitive skills have declined, my knowledge of the stock and bond markets has increased. How about for those of us who are facing declining mental faculties, simply going into the fine age-specific Target funds and maybe some tax-free bonds. Then one can forget it all and still stay safe.
In determining the equity portion of our portfolio, my wife and I use the rciprocal of our average ages. Prior to the recent meltdown, we had about 30% in equities.(our average age last year was 72)
I felt sorry when I heard of Senior Citizens “losing their life savings” in the crash. What were they thinking investing that heavily in equities as “seniors”?
With our mix, we lost about 12% and it’s coming back.
Investment agencies should put heavy emphasis on this rule of thumb for seniors so they would noy be caught up with “unreasonable exuberance” with equities.
What does Mr. Utkus mean by the pseudo-statistical quote “the prevalence of dementia doubles every 5 years after 60″? At 75, does he mean that I am now 8x more ‘demented’ than at 60.
The hump curve is a guide for the absolute max mental capabilities of a ‘typical’ individual over time. There is a another curve, that rises steadily, showing the accumulation of knowledge (and wisdom) with time of study/experience. At any age it is the lower of the two curves that defines the limit of any one person’s ability to make sound financial decisions; as 11.01.09 @ 12:02 (to his credit) has found out.
I don’t think ones cognitive skills declines over time. A twenty year old might respond a lot quicker to a situation than a seventy year old, but the seventy year old has fifty more years of life experiences to reflect upon (ergo the response delay). The key is staying involved. Two of the previous comments make my point. One senior who has lost interest and the other who follows financial developments. Best regards.
Very interesting, thanks. I study more (read and askVanguard and others for advice) and do more of my decision making every day. I’m 71. I have very good results.
Maybe true. Certainly it is true that our physical and mental ability declines as we age. I am 75 and I teach an AARP senior driving class. In driving, it is the total of eyes, reflexes, flexibility,etc, Total of mental and physical. Given the age related decline, we teach adaptation. How to be better with less. Same applies to investing. More education, more analysis, more effort. But we can still be the best.
It seems an obvious solution is to find a trustworthy advisor who one can lean on a little –or a lot–depending upon your needs. I’m 72 and make all of my decisions, but I often call someone–in my case a Vanguard advisor–and tell him what I am planning to do and ask whether he (or she) believes the decision is wise in view of my established goals and strategies. I’ve been pleasantly surprised to have been disuaded from decisions that I had believed were thorougly logical.Indeed, having an advisor look over one’s shoulder can be a great benefit at any age. I should add that I work neither for Vanguard or any other advisor.
I wouldn’t place a great deal of stock (so to speak) in this study except as a gross generalization — and as we all know, generalizations usually break down in individual cases. I’m 70 and have been investing successfully for about 30 years now, and the experience and knowledge I’ve accumulated over that time still serves me well. My advice to anyone, especially ‘seniors,’ is simply to avoid the kind of sophisticated, structured products touted by many financial advisers. They’re mostly structured to produce income — for the broker.
Reality enlightens our awareness that we are losing, and will continue to lose, our (cognitive, or other) ability to make informed choices, or should I say, “lessen” our ability – and this becomes a real fear. Today, we may “diversify” (which I have) – but, considering our current, and expected future, economy – our choices today can be only “our best choice at the time”. Should we consider a younger person – a friend, relative, local professional – to make our future choices for us? (or is this your marketing intention anyway?) – but, how can they, how would they know, what our choices might be? What the future economy – U.S. or global – might include to color our choices? I will continue to think about this choice, keep diversified, keep global, invested in equities – but, I admit, I am concerned – but want to retain most of my savings for grandchildren’s education, hopefully not needing it for costs of illness or long-term care. It is a dilema we all must face, answer, and choose…….
Thank you for the “food-for-thought”
Interesting commentary and timely. My wife and I are 64. She is a Mathematician and I am an Economist, perhaps the best combination on the planet to build wealth. And we did. We have always considered ourselves pretty astute. Recently we had a trusted major corporation come out and replace our dishwasher. The installer turned out to be a con artist, saw us as easy elders to scam, and we were sucker punched paying more than twice what should have been charged for the job. A complaint with the company fixed the problem, but we were, in retrospect, humbled for the first time in our lives as consumers. This experience makes us pause and question our cognitive abilities as seniors. Each year we have a “financial project.” We decided what we’re going to do is to get the help of Vanguard Flagship services and automate our portfolio so that neither of us will have to make life-changing decisions as we age. Perhaps, you should also think about it?
Very thought provoking article! I’m 70, and my approach is to put the majority of my IRA (former 401K) with a fee-based advisor and retain a seperate investment account for as long as my “cognitive” skills are still there. So far, so good.
The unanswered question(s) for me would be: What is the RATE at which the young acquire financial skills/knowledge and what is the RATE at which we oldsters use it? This 54-year-old really needs to know!