Christopher Shea writes the “Week in Ideas” column in the Saturday Wall Street Journal. He reviews a variety of topics from the world of the social sciences.
One item from December 4 caught our attention. It was titled “Older Brains, Worse Trades.” It reviewed findings of research titled “Do Older Investors Make Better Investment Decisions?” that is scheduled to be published in The Review of Economics and Statistics.
Researchers George Korniotis and Alok Kumar analyzed a large population of investors from a “major U.S. brokerage house” for 1991 to 1996. They found that during that period, investors over age 72 had annual returns that were on average three to five percentage points lower than investors with similar portfolios who were under age 50.
The two researchers noticed that older investors tended to have more holdings and traded less than younger investors (both good traits), but they found that a combination of poor execution and high levels of correlation between the stocks that they owned reduced their investment returns.
After analyzing this data they suggested that older investors should always seek outside advice for their investments.
Our take
- We don’t know if this study was conducted at a discount broker or not. If it analyzed investment performance at a discount broker, then each investor took full responsibility for all investment decisions.
- If this analysis was conducted at a full-service brokerage, then the broker for the investor likely often influenced the decision to buy or sell a stock, bond or mutual fund. As a result, the broker might have helped create portfolios that were different for investors based on their ages. These differences could have been intended or not, it is impossible to tell.
- Because the older investors had lower portfolio turnover, it is possible that these investors fell in love with the investment that they held and were more likely to hold on to it even after the prospects of the company changed. They held the stocks as they were going up, and held them as they came back down. That could have occurred because the broker was unwilling to proactively suggest that the client sell these stocks or because the older investors were unwilling to listen to their brokers.
We will be interested to read the full research when it is published.
Our assumption is that it will spotlight the drawbacks of extreme buy-and-hold mentality. This is when an investor ignores the probability of whether or not a good outcome is still likely for the particular holding. Buy-and-hold preferences work well when considering diversified investments but can lead to trouble if there is no sell discipline to capture profits from individual stocks and reduce risk through diversification.
Do you have long-held positions that make up more than 10% of your overall portfolio? Do you want a second opinion about their value and fit in your investment strategy?
~ Gary Brooks, CFP®, Allyn Hughes, CFP®, and Nancy Jones, CFP®, — Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA
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