Risk aversion and loss aversion are clearly two of the most fundamental concepts in investing. People who are more loss averse and/or more risk averse tend to invest less in risky assets like equities and thus have lower retirement nest eggs later in life. Risk aversion depends on all kinds of factors like gender, income, personality, etc. but one factor has an outsized influence, yet is often ignored by practitioners: age.
Apr 12, 2022·edited Apr 12, 2022Liked by Joachim Klement
The ages where the coefficient seems to fall are also ages where people in conventional, job-based careers are busiest and more involved (mid career). Could it be a case of people paying more attention to their portfolios leading to more loss aversion and worse performance as so many studies have shown before?
This might not be a case of clear cause and effect, but do you think the magnitude of the coefficient plotted over age is correlated to the amount of 'free time' available for the investors?
The concept of becoming less risky with age is in itself a flawed concept. A couple in their 60's have a 1:2 to 1:3 chance of making the mid 90's. That's 30 years away!
Making a portfolio conservative with a 30 year timeframe is a flawed thought process. No geared share investments I grant you but a 70/30 portfolio may well be needed if you want more than bread and water, especially in a low interest rate and rising inflation environment, by the time you are 90 or 95. When would such an environment happen anyway....pffff.
Of course when the client runs out of money the adviser will be well retired, I pity any clients if that's the opinion of their adviser.
The ages where the coefficient seems to fall are also ages where people in conventional, job-based careers are busiest and more involved (mid career). Could it be a case of people paying more attention to their portfolios leading to more loss aversion and worse performance as so many studies have shown before?
This might not be a case of clear cause and effect, but do you think the magnitude of the coefficient plotted over age is correlated to the amount of 'free time' available for the investors?
The concept of becoming less risky with age is in itself a flawed concept. A couple in their 60's have a 1:2 to 1:3 chance of making the mid 90's. That's 30 years away!
Making a portfolio conservative with a 30 year timeframe is a flawed thought process. No geared share investments I grant you but a 70/30 portfolio may well be needed if you want more than bread and water, especially in a low interest rate and rising inflation environment, by the time you are 90 or 95. When would such an environment happen anyway....pffff.
Of course when the client runs out of money the adviser will be well retired, I pity any clients if that's the opinion of their adviser.
FIFO: in a typical three-decade retirement, a fixed income (laden-portfolio) is a fixed outcome: penury!