Research shows the optimum age for making financial decisions is our early fifties. This is generally the point where people have a lot of life experience and still have a sharp mind. Cognitive decline – a decrease in our capacity to solve new tasks – usually hasn't yet set in.
For investors approaching their mid-fifties, or for those who've already met the milestone, it's worth being aware of the psychological barriers that can impact our decision making, so we can take steps to overcome them. Here are five common psychological barriers which are particularly relevant to investors aged over 55:
Aversion to complexity
As we get older, it generally becomes harder to solve new problems and process new concepts. So we often find we have an aversion to complexity. That is, we shy away from difficult decisions. If we're presented with a choice, we'll often pick the simplest solution, because our minds think 'simple = safe'. But when it comes to your investments and retirement, this may not be the best idea because everyone has a different plan for their savings and investments. So what can you do now to make sure you're prepared for tough investment decisions later on? Choosing an investment framework that has flexibility is a good idea. For example, a multi-asset strategy – like a diversified multi-manager fund - that lets you easily increase or decrease your investment risk profile. It's also good to have a trusted adviser or family member who understands your financial strategy, and can assist you in making decisions about your investments in the future.
Desire for control
If we fear we're losing our ability to make decisions, we often do what we can to gain back some control. This desire for control, while psychologically comforting, may not necessarily lead us to financially sound decisions. For example, some people enjoy actively trading shares and having control of where their super is invested. But some investors start to realise that by a certain age, keeping up with stock research and the associated administration becomes a real task. This is where there's a risk that your desire for control could lead you to start making poor investment choices. One idea is to consider separated managed accounts (SMAs). These structures give you direct share ownership, while partnering with a proven investment manager for share selection and execution.
Status quo bias
When faced with the need to make a difficult decision, our human preference is often to do nothing. We tend to think “she'll be right”. This is a shortcut we are programmed with in order to get us through a complex world with minimal stress. More so as we get older, people tend to be biased towards doing nothing or maintaining their previous decision. So what can we do today? Make the tough decisions now, so you won't have to make them in the future. For example, have a plan in place to ensure your asset allocation (your mix between defensive and growth assets) can easily change in line with your age and changing circumstances. And make sure your insurance options will be correct for your situation when it changes. This could save you from taking on too much risk and spending more than you need to.
When we're older, and decision-making becomes harder, it's easy to be overoptimistic; we tend to focus on and seek out positive news, while ignoring or discounting negative messages.2’3 This can lead to poor behaviours. For example, if share markets are strong, it's hard to imagine them taking a tumble. But if a portfolio is too heavily weighted to shares, and markets fall, it may take a long time to recover – which may be harder to stomach when you're older. So it pays to ensure your portfolio is sufficiently diversified and future proof. It's important you're aware that overoptimism may strike. If you can recognise this, you'll be better placed to make decisions.
We're probably all guilty of putting things off to another day, even when we know it isn't in our best interests. This can be particularly true for savings and investment decisions. As we get older procrastination may be a psychological refuge for not wanting to deal with an emotional reality. Regular conversations with a trusted adviser or family member can be useful, while automatic actions, like direct debits to pay bills or a regular investment plan into a trust for a grandchild may be the easiest way of dealing with this challenge.
An appreciation for how these psychological barriers and ageing can impact your financial decision-making process is important. Taking steps towards putting in place strategies to overcome these challenges now is a good way for you to ensure that key decisions regarding your wealth are in line with your goals when they change over coming years.
And consider speaking with a financial adviser early on. They can support you to achieve financial well-being by working with you to put in place an investment solution that is appropriate for you now and in future.
1 The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation. Sumit Agarwal, John C. Driscoll, Xavier Gabaix, and David Laibson, October 19, 2009
2 Fung H.H., Carstensen L.L. “Sending memorable messages to the old: age differences in preferences and memory for advertisements.” Journal Pers Soc Psychol. 2003 Jul;85(1):163-78.
3 Turk, S., Mather, M., Carstensen, L.L., “Aging and Emotional Memory: The Forgettable Nature of Negative Images for Older Adults” Journal of Experimental Psychology, 2003, Vol. 132, No. 2, 310–324.
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