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Investment decision-making and aging brains
Old 05-10-2014, 01:06 PM   #1
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Investment decision-making and aging brains

As I approach geezerdom and RMD time I still think that I can adequately manage my financial stash as well as I did 20 years ago. This article clearly does not support my thesis. After reading it a couple of times I'm thinking that I may have to reassess my nearly 70yo abilities and risk assessment.

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Around 70, wrote Alok Kumar of the University of Miami, investment skill “deteriorates sharply” and investors’ “ability to handle risk declines.”
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David Laibson, who specializes in behavioral finance at Harvard University, said in a 2011 interview with the American Association of Individual Investors that between those who have full-blown dementia and other kinds of cognitive impairment, “we’re talking about, in total, half the 80-year-old population that is not in a position to make important financial decisions” (italics added).
That means you and me, my friends.
This is what the financial-services industry, obsessed with preventing retirees from outliving their money, just doesn’t get: What good are sophisticated solutions like inverse glide paths if half your clients have trouble balancing their checkbooks?
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That’s why, as we age, we need to look for regular income through some kind of annuity besides Social Security; automatic solutions like regular rebalancing or life-cycle income funds; and a support network of friends and family to lean on with specific instructions for spouses and survivors.
Things we should avoid: focusing on individual stocks or putting too much into equities or exotic “alternative” investments with brief track records and unexpected volatility. And active trading, which is a joke for most people anyway, could be a catastrophe for older investors.

“Based on our evidence, a passive buy-and-hold strategy seems most appropriate for older investors, especially if they hold larger portfolios,” the University of Miami’s Kumar told me in an email.
So, “keep it simple” should be the mantra, especially as we age. “You’ve got to address these issues at 60 instead of 80, because at 80 you may be too late to the game,” Harvard’s Laibson said.
“I think you should do it as early as possible,” agreed Verghese, adding: “If you haven’t done it at age 70, that’s not too late.”

There are all kinds of risks in investing: economic crises, political turmoil, market panic, whimsical central bank policy. Handling them is tough enough. But who knew that the biggest risk of all may be our own aging brains?
The biggest retirement risk no one talks about - Howard Gold's No-Nonsense Investing - MarketWatch
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Old 05-10-2014, 01:14 PM   #2
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Starting an annuity ladder at age 70 may be a way to accept more risk with the remaining portfolio.
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Old 05-10-2014, 02:03 PM   #3
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You may be perfectly competent to handle your portfolio now & into the future. The studies are based on statistical analysis of a large (and sometimes, not so large) sample.

My concern is how do I know that I am not capable of handling my finances? Will I have sufficient self-awareness early enough that I can transition financial management to someone I trust? Will I know who to trust?

I have a few more years before I have to worry about this, but it does creep into my mind sometimes.
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Old 05-10-2014, 03:58 PM   #4
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Based on our evidence, a passive buy-and-hold strategy seems most appropriate for older investors,
Or, if you are already running a set-it-and-forget-it passive indexing portfolio, there may be nothing to change. My own personal expectation is that if I set it up right and make clear enough instructions, then either my older self, or my mostly uninterested in investments children will be able to do what needs to be done. RMD can be handled by the custodian. Rebalancing can be made very simple, and it isn't very time critical either.

I think this concern about decision making is more directed at people who believe that they need to jump in and out of markets and investments based on astute assessments of future directions. Something I already know I cannot do, so do not try. Or people who need to decide if an exotic investment they are being sold is right for them or not. I already know it isn't so I never even listen to the pitch.
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Old 05-10-2014, 04:19 PM   #5
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Originally Posted by growing_older View Post
Or, if you are already running a set-it-and-forget-it passive indexing portfolio, there may be nothing to change. My own personal expectation is that if I set it up right and make clear enough instructions, then either my older self, or my mostly uninterested in investments children will be able to do what needs to be done. RMD can be handled by the custodian. Rebalancing can be made very simple, and it isn't very time critical either.

I think this concern about decision making is more directed at people who believe that they need to jump in and out of markets and investments based on astute assessments of future directions. Something I already know I cannot do, so do not try. Or people who need to decide if an exotic investment they are being sold is right for them or not. I already know it isn't so I never even listen to the pitch.
+1

I read the article and gave some thought to my/our situation. With the lion's share of our investments in two balanced funds (Wellington and Wellesley) there is no rebalancing and very little decision-making required. My only concern is doing something when I need to be doing nothing - and since doing nothing is my natural state and something I seem to have a real talent for, I think I'm in good shape.

As a back-up, DW and CPA DD have written instructions outlining how I passively manage our portfolio. I have complete confidence they can take over once I start drooling into my oatmeal.
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Old 05-10-2014, 04:24 PM   #6
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I currently self manage my portfolio of 9-10 index mutual funds that cover most equity and bonds sector. I plan to reduce this mix over the next 5 years to 3 domestic, international and bond funds with specific instructions of re-balancing and withdrawal to make it easier for DW and DD.
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Old 05-10-2014, 04:33 PM   #7
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My only concern is doing something when I need to be doing nothing - and since doing nothing is my natural state and something I seem to have a real talent for, I think I'm in good shape.
+1

One can do a lot worse than picking a good, low-cost balanced fund and let it ride. I learned my lesson from trying to grow plants. The more I dink around with them, the faster they die. Water, a bit of fertilizer when I think about it, and I have a lush garden of delight. So now I only dink around with things I want to rid my life of. Works great!

Financially, that means picking my AA, leaving it alone and re-balancing (fertilizing) it about once a year. When I can no longer do that well, it's time to move it to PSSSSSST....Wellesly and let somebody else do it for me.
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Old 05-10-2014, 04:35 PM   #8
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I'm another one who used to have way too many investments (between 60 and 70, almost all individual stocks or bonds).

Over the past couple of years, I've consolidated a lot and cut the total about in half. I am now in 13 funds, 8 ETFs, 7 stocks, and 3 bonds. I'm extremely pleased with this progress, but I obviously still have some distance to go. By this time next year, I expect to cut the total number in half again.

I keep reading here about all of you who are happy with a mere handful of funds, and I'm a bit envious. This consolidation is tough on me!

Still, it's the only logical direction to go. My grandfather was happy and successful managing his investments in his 90s, but my father threw up his hands in despair when he was only in his late 60s. You never know, so it just makes sense to prepare as best you can.
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Old 05-10-2014, 04:47 PM   #9
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Originally Posted by braumeister View Post

Over the past couple of years, I've consolidated a lot and cut the total about in half. I am now in 13 funds, 8 ETFs, 7 stocks, and 3 bonds. I'm extremely pleased with this progress, but I obviously still have some distance to go. By this time next year, I expect to cut the total number in half again.
My biggest problem with simplifying more is that I want my assets split between several financial houses. Given how easily bad guys were able to penetrate various corporate computer systems and stay there undetected for weeks and months, I think this is a prudent safeguard in the event the bad guy mess with accounts. While I believe I would be ultimately be made whole, my funds could be tied up for quite a bit of time until any mess is straightened out.
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Old 05-10-2014, 06:00 PM   #10
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With the very wide re balancing band I use (10%) I hardly ever have to do anything (just twice since I retired 2002). Plus, with 45% of liquid assets in balanced funds (Wellesley, Wellington and Target Retirement Income), there is a lot of automatic rebalancing going on.

I've lived from my portfolio since retirement and it is now twice what it was then. My plan is to keep on trucking as is and I suspect that as I go along my natural inertia and tendency to do nothing will only increase. My core belief is that the less I mess with a balanced portfolio the better things will turn out. I hope there is a core brain cell or two that remember that for the duration.
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Old 05-10-2014, 06:36 PM   #11
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We have chosen to be ultra conservative. 10% in gold, and 90% in Dogecoins, Litecoins, and Bitcoins... The codes are buried in a waterproof coffee can in our back yard.

Better safe than sorry...
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Old 05-10-2014, 08:41 PM   #12
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Conservative! Way too much in gold Others look about right!
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Old 05-10-2014, 11:31 PM   #13
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I think there is not really much need to periodically rebalance after age 75. Set up a simple portfolio of 4 or 5 balanced funds at age 60 or 65. Rebalance if you feel the need to over the next decade. Set up automatic RMDs to your checking account when you reach 70.5 and then leave the portfolio alone. Make sure your heirs have a list of all your funds and know about the RMDs and where they are going. At some point before you die they will probably have to take over your checkbook.
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Old 05-11-2014, 12:31 AM   #14
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I think there is not really much need to periodically rebalance after age 75. Set up a simple portfolio of 4 or 5 balanced funds at age 60 or 65. Rebalance if you feel the need to over the next decade. Set up automatic RMDs to your checking account when you reach 70.5 and then leave the portfolio alone. Make sure your heirs have a list of all your funds and know about the RMDs and where they are going. At some point before you die they will probably have to take over your checkbook.
But its not just that - it is remembering to pay the credit card bill, the property taxes, file your taxes.. the list goes on! There is a lot that you can automate, but then you have to remember to have enough money in the checking account.
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Old 05-11-2014, 01:22 AM   #15
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But its not just that - it is remembering to pay the credit card bill, the property taxes, file your taxes.. the list goes on! There is a lot that you can automate, but then you have to remember to have enough money in the checking account
Most of this I already have automated. Not taxes, but I'd automate that if I could. It's great to not have to pay any attention to this stuff for months and months if I don't want to. Maybe I have a natural talent for lazy, but for investment management it seems to work well and be a lot less worry than active management.
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Old 05-11-2014, 12:45 PM   #16
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But its not just that - it is remembering to pay the credit card bill, the property taxes, file your taxes.. the list goes on! There is a lot that you can automate, but then you have to remember to have enough money in the checking account.

You are very right. That is why I posted that at some point heirs will have to take over the checkbook for many of us. Upon further reflection I realize that this could be a very big problem for those who do not have responsible, caring, knowledgeable heirs to depend on in later life.
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Old 05-14-2014, 07:28 PM   #17
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You are very right. That is why I posted that at some point heirs will have to take over the checkbook for many of us. Upon further reflection I realize that this could be a very big problem for those who do not have responsible, caring, knowledgeable heirs to depend on in later life.
That's our situation, no heirs.
EDIT to clarify post.

Its just not remembering to pay the bills. It got to the point in our family that DF didn't know who he did business with. Then it got worse, any charity that asked got a donation. His attorney had explained Medicaid lookback, but DF grew to believe it didn't applied to the church, red cross, or other good causes. He lived in a state that does clawback Medicaid expenses, his heirs didn't care about inheritance, only that his actions didn't bankrupt their lives.
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