Behavioral scientists have long known that people feel the pain of losses more strongly than the joy of gains. They call this phenomenon loss aversion. What they're just beginning to learn, however, is that retirees are generally much more loss averse than younger people.
How much more? Columbia University business professor Eric Johnson recently conducted a study to find out. He assembled a group of people over age 60 and asked them if they would take the following wager: You have a 50% chance of winning $100 and a 50% chance of losing $10.
Nearly half of those people said they would refuse the gamble -- meaning that they weighed losses 10 times more heavily than gains. By contrast, earlier studies have shown that the population as a whole tends to weigh losses two to three times more heavily than gains.
Reseachers aren't yet sure why loss aversion spikes with age. As you get older, you may feel that you can't afford to take hits to your portfolio because you have fewer years ahead to make up for them.
Another factor may be the endowment effect (see point No. 5), which increases your desire to hold on to something you already have. Whatever the cause, loss aversion is a problem if it leads you to invest too conservatively in your retirement years, loading up on bonds while avoiding stocks. Your stash becomes more vulnerable to inflation that way.
Put these findings into action:
Keep up your financial knowledge. Research suggests that well-educated investors are much less loss averse than average. So continue to follow money news and advice in retirement, or even sign up for a personal-finance class.
Fix your mix. Anthony Ogorek, a financial adviser in Williamsville, N.Y., recommends that by the time you pass age 60 you keep no more than 60% of your assets in stocks: You will be less likely to freak out and flee to 100% cash the next time the market tanks.
Get some outside perspective in your later years. That might mean investing some money in a life-cycle fund targeted to your age or using a money manager (available affordably these days via many 401(k) plans).
|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||4.41%||4.44%|
|15 yr fixed||3.33%||3.31%|
|30 yr refi||4.39%||4.41%|
|15 yr refi||3.31%||3.30%|
Today's featured rates:
GM won't have to tell customers to keep their recalled cars parked until fixed, after a federal judge denied emergency motion Thursday. More
The Chinese social networking startup priced low but traded up. More
As Detroit moves closer to reaching a bankruptcy deal, retired civilian workers are poised to be left worse off than firemen and police officers. More