Positive Memories Are Nice To Have?
I think we all agree that focusing on the good things in life tends to be more productive or is it? Apparently, not when it comes to our investment portfolio. A recent WSJ article poses the question: How well do you recall the recent financial crisis? Most people, understandably want to move on, and conveniently forget unpleasant memories. This article points out that this feeling of optimism can be costly to us.
They compare our memories in our brains to a computer. Our brains operate totally differently than a computer. We most likely can’t recall how much the market dropped between 2007-2009. Research has shown that as we age there are “gaps and distortions” that can promote our taking risks that we would be better off not taking.
The Perspective Of the Older Adult
We assume that with age comes wisdom. This is true but older people also develop biases that can play with the details of their memories. There was an interesting study led by a Dr. Castel where he paired a series of faces with financial gains and losses. One example is the paring of a dark haired woman with a loss of $100 and a man with a beard with a gain of $50. Younger and older people in the study remembered the pairings associated with a financial gain more often! Additionally, younger participants more likely recalled big losses while the older group with an average age of 78 recalled people more when they incurred financial gains. Seniors were the group that were 25% more likely to forget the largest losses! These findings support other research that has been conducted that shows older adults pay far more attention to positive information.
What is The Impact On Our Financial Decisions?
This recent research may predict that older people will be blinded by a bull market. Their bias towards the positive and the gains in the market leads them to a sense of forgetfulness of the last bear market. This article suggests that ways of circumventing losses as we age is to set up a “financial autopilot” program. This program sets up target date fund for accumulating asset. For those already drawing money down – annuities can provide an autopilot for a paycheck.. They advise getting help with this as annuities can be tricky.
These autopilot defense programs can counteract any confusion on what our memories recall and distort which can lead to poor financial decisions.
Always nice to recall the good memories but not at the expense of our portfolio’s.