Secret #6: Take losses in stride

By Penelope Wang, senior writer


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).

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.79%3.84%
15 yr fixed2.90%2.95%
5/1 ARM3.23%3.23%
30 yr refi3.79%3.84%
15 yr refi2.98%3.01%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,164.95 -251.90 -1.45%
Nasdaq 4,635.24 -48.17 -1.03%
S&P 500 1,994.99 -26.26 -1.30%
Treasuries 1.68 -0.08 -4.34%
Data as of 1:33pm ET
Company Price Change % Change
Bank of America Corp... 15.15 -0.28 -1.81%
Apple Inc 117.16 -1.74 -1.46%
Microsoft Corp 40.40 -1.61 -3.83%
AT&T Inc 32.92 -0.04 -0.12%
General Electric Co 23.89 -0.19 -0.79%
Data as of Jan 30

Sections

Super Bowl ads are getting more expensive every year. But are companies wasting money? In the social media era, tweets and viral videos can also get a company noticed. More

Many in the middle class, particularly the single and the elderly, won't see any tax breaks under Obama's MIddle Class Economics plan More

Here's where Seahawks and Patriots fans eat, shop, and play, according to data from ad tech startup PlaceIQ. More

Wix is advertising in the Super Bowl -- but it's just the latest tech unknown to make its debut there. More

401(k) balances reached a record high last year, thanks to a soaring stock market and larger contributions from workers participating in the savings plans, according to Fidelity. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2015 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2015. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2015 and/or its affiliates.