investing

Make sound investing decisions at any age

 

 

Use your head

When people make financial decisions, they use "crystallized" thinking, which is a combination of reasoning ability and past experience, says Harvard economist David Laibson.

In a 2009 study, Laibson and other researchers showed crystallized thinking peaks at about age 53, making middle-aged people better at problem solving, from what qualities to look for in a financial adviser to comparing credit offers.

Laibson says as people become elderly, it's more difficult for them to make sound financial judgments, and they become more vulnerable to scams.

Use your middle-age mental prowess to prepare for the vulnerable years ahead, Laibson says. While there's no foolproof system for safeguarding against scams, you may want to take steps to eliminate many investing decisions, perhaps by switching to investments such as target-date mutual funds, he says. Target-date funds are geared to investors who will reach retirement by a certain date and adjust investments toward safer vehicles such as bonds as the investors age.

 

Profit from patience

Would you rather have $5 now or $7.50 in 90 days?

From an investing perspective, the right answer is often to wait for the bigger gain. Younger adults usually opt for the quicker, smaller payoff.

"There is no specific turning point or age at which people become more patient. The process appears to happen gradually over the course of the life span," says Corinna Loeckenhoff, director of the Laboratory for Healthy Aging at Cornell University, who recently examined the effect of age on financial gain and loss.

Of course, an investment can rise in value and then drop precipitously as did some of the dot-coms of the '90s. Still, an urge to quickly take a profit often means you'll miss out on later gains while racking up trading charges, says Andy Tilp, a CFP in Portland, Ore.

Tilp says many financial planners will advise following a systematic plan of rebalancing, meaning selling off a portion of holdings that have risen and making other investments that are out of favor and thus have temporarily depressed values.

 

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