Many younger investors think they're the best at high-return risk-taking, but a recent study shows that to be wrong.
A common assumption in investing, and one that I've come across many times in my own investing career, is that older people become more risk-averse and cautious, and so put their money into safe investments rather than taking the extra risks needed to gain high returns. High-risk investing for higher returns, it is thought, is better suited to younger people with more years at their disposal.
But that theory has been turned on its head by the results of some recent research carried out by Vince Stanzione of www.fintrader.net. Stanzione, a fund manager, investment writer and teacher, and financial spread-betting expert, surveyed 1,000 of his own students, splitting them into three groups -- ages 18-30, 30-50, and over 50, and then compared their investment returns over the past five years.
Oldies did better
What he found was that the over 50s group turned in the best performance, and by quite a large margin. The oldies turned in performances that beat the 30-50 age group by 25%, and trounced the 18-30 year old whipper-snappers by a very impressive 40%.
Especially interesting was the finding that the oldest group of investors, contrary to common expectations, actually took higher risks, and were quite happy to stake some of their money on commodities like oil and gold, whose long-term fundamental values are generally considered a lot harder to evaluate than blue-chip companies, which are often thought to form the mainstay of many older investors' portfolios.
And do you think that the internet is a tool most used by geeky youngsters? Think again, because over the course of the study, it was the over 50s group again who made the best use of online resources, using financial information sites, prices and charts, and discussion forums to great effect.
Discipline matters
So how did the oldies manage to wipe the floor with the young upstarts? The secret wasn't strategy, it was discipline.
One of the things we at The Motley Fool regularly warn people against is over-trading. Every time you buy or sell an investment, you're paying commission and losing out on the spread, and most people really don't understand quite how much of a dent that can make in their long-term returns.
Unsurprisingly, as it is a lesson that generally does seem to be learned only by experience, the 18-30 group traded a lot more frequently than the older groups, making quite a lot of very short-term trades (which are the absolute worst for losing you money in fees).
The youngest group also broke their own rules the most frequently, failing to stick to a firm strategy, and trading in and out of investments imprudently.
Also, they were the most keen on penny shares, which is a common failing that we see at TMF amongst inexperienced investors. Penny shares, people often think, are far more likely to bring quick profits than boring old blue chips (with the old "Elephants don't gallop" mantra often being bandied about). But many penny shares are usually penny shares for a good reason -- they started out as highly valued companies and fell. And they usually suffer from by far the largest spreads of any group of companies in the market.
By contrast, the 50+ group were more disciplined, stuck to their strategies more unemotionally, and kept the best records by which to gauge their performance and learn from past trades.
The lessons
But before we go away thinking that older folks are the best investors and biggest risk-takers, I think it is important to note that, though Mr Stanzione selected good, statistically-meaningful samples, and carried out his study over a meaningful period, all of his guinea pigs were selected from the ranks of his own students. And that probably suggests that his oldies were more likely to be keenly enthusiastic investors than the average older person putting a few bob into shares each month in the hope of a comfortable retirement.
But even if most people who use The Motley Fool site are probably less active investors than Stanzione's students, his study really does reinforce a few of the lessons that we think are essential -- don't overtrade, be wary of penny shares, stick to your strategy, and keep good records from which to learn.
And one final result from this study warms our hearts -- all of the students expressed a deep distrust of finance professionals, wanting to take control of their own financial futures rather than paying high fees to advisors and investment managers in return for the dismal performances that typify the industry.
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