How age affects our investment decisions

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Milestone birthdays do play an important role in influencing investment behaviour, most evident in a declining appetite for risk, a new study has confirmed

Reseachers from the UWA Business School at the University of Western Australia and the Department of Applied Finance and Actuarial Studies at Macquarie University investigated age-related effects on investment behaviour, focusing on milestone birthdays

Their paper, which was published as part of the CSIRO-Monash Superannuation Research Cluster Working Paper Series, supports the view of a positive relationship between age and investment activity and confirms a declining appetite for risk with age.

Further, the researchers found that investment performance may have a more consequential impact for individuals as they age.

They also found that men were more likely to make changes than women.

“We do find a clear role for age in the propensity to make investment changes, with some ages suggestive of milestone effects,” the paper says.

The research was based on the investment choice activity of members of the Mercer Super Trust, which has 220,000 members, over five years.

“Our focus is the propensity of members to make changes to their investment strategy and the change in risk level of that change. And whether behaviour is significantly different around milestone ages,” the report says.

Most members remain with designated defaults reflecting a status quo bias, inertia and inattentiveness.

The probability that any super fund member will make a change to their accumulated balance in any year is 3.5 per cent and the probability that they will make a change to future contributions is four per cent.

The odds of a change to the accumulated balance increased by 65 per cent if the member was turning 55 that year and by 168 per cent if the member was turning 60. A similar pattern was observed for changes to future contributions.

Men were more likely to make changes at these milestone birthdays than women. The reduced odds of women changing their asset allocation was more pronounced when it came to making changes that increased growth assets.

Among those who made a change over the five years of the study, 43 per cent reduced their exposure to growth assets, 34 per cent increased their exposure to growth assets and 20 per cent were classified as “neutral”, which means the change was plus or minus five percentage points in growth assets.

This mix varied by financial year: fifty per cent increased their exposure to growth assets in 2006/07 (when a bull market in Australian shares was approaching its peak); but only 15 per cent increased their growth exposure in 2008/09 (after the market had corrected and the financial crisis was in full swing).

“This suggests that investment performance may have a more consequential impact for individuals as they age,” the report says.

Changes made at younger milestone ages, such as 40 and 45, were towards growth, while changes at 55 and 60 were more likely to be away from growth.

 

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