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Rich and Co.

As Investors Age, ‘Risk Tolerance’ Shrinks

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This is likely a physiological effect of drops in brain ability with age (45+, worse in men) which may also accompany drops in health.  It may have serious results for retiree investment returns.

As Investors Age, ‘Risk Tolerance’ Shrinks

“Taking more risks during an economic rise and fewer risks during a downturn amounts to buying high and selling low. That is a very counter-productive strategy,” says study author Rui Yao.

U. MISSOURI (US) — According to a new study, willingness to take financial risks, or “risk tolerance,” changes in response to age and the economy.

… attitude toward investment risk-taking is influenced by the age of the investor and the economic climate of the time period.

“Age has a pragmatic relationship with financial risk.”

“Each additional year of life represents a shortened time horizon for recouping market losses.  In addition, individuals approaching or in retirement may shift focus from asset accumulation to asset preservation. These individuals may become relatively more concerned about potential loss of money when they are closer to retirement or no longer have a steady source of income.”

Yao found that risk tolerance also was influenced by the economic climate of the time period.

As the economic outlook increased, so did risk toleranceHowever,…risk tolerance also decreased as the economy slowed. Yao says this is a concerning trend.

“Investors should not let the economic climate affect their risk tolerance.  Taking more risks during an economic rise and fewer risks during a downturn amounts to buying high and selling low. That is a very counter-productive strategy.”

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Written by Rich and Co.

January 10, 2012 at 9:28 pm

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