Money choices, and more specifically investment patterns, are determined by several aspects of our life and personality, which includes (but is certainly not limited to) our age. While the principles of traditional personal finance advisory emphasise taking age into account as a crucial factor for developing investment portfolios, financial markets have witnessed noticeable shifts in the way people across ages approach their financial decisions. Many of these trends contradict the idea that age is a reliable indicator of financial behaviour. Conventional wisdom, like the ‘100 minus age’ method, which suggests subtracting an investor’s current age from 100 to arrive at the percentage of equity they should have in their portfolio, has given way to a more flexible and layered approach to understanding the risk-taking capacities, aspirations and traits of people interested in attaining financial well-being.
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The rise in financial literacy, curiosity about financial markets, variety of investment options, and appetite for risk (especially amongst generations that have inherited wealth) has set off a change in investor behaviour. In a developing country like India, the percentage of people interested in equity, derivatives, and mutual funds has seen an increase across various age categories that are moving beyond traditional means of investing. To put it into perspective, a 50-year-old wishing to invest in real estate can explore the idea of investing their disposable income in lease funds or real estate investment trusts (REITs) because of the range of products available in the market today. If they find themselves with little to no liabilities and working towards specific milestones in life, they can venture into riskier asset classes.
As Akhil Rathi, Vice President, Financial Concierge at 1 Finance, confirms, there are real-world examples that break the mould of age-restrictive behaviour in financial markets. He recalls a middle-aged client developing an interest in trading in derivatives, which come with their own set of financial risks, and an investor in their 70s regularly investing in equities. Nevertheless, he adds, older investors do have a prominent sense of comfort and attachment with certain investments that have served them well in the past.
The financial behaviour of younger investors today also contradicts conventional theories and wisdom. Rationally, one may expect younger people to make long-term investments because of their active cash flow and ample time horizon, but their behaviour in the markets reflects the exact opposite — they tend to switch between instruments often and sell too fast. That said, younger investors between the ages of 18 and 30, who are usually devoid of liabilities, predictably do steer towards high-risk/high-return investment options like crypto coins and derivatives, simply because having fewer financial obligations increases their tolerance for risk. This might cause them to develop a tendency to constantly switch between multiple such investment options with the goal of amassing wealth in a shorter span of time — a behavior pattern that can be attributed to age, among other factors.
Sound financial advisory that is sensitive to the investor’s life stage and needs, but does not pigeonhole them into specific asset classes based on their age, works towards breaking through assumptions in a nuanced way. It prepares investors to evolve with time and survive in dynamic markets. While traditional personal finance advisory may have fixated on rigid thumb rules of investing, it is imperative now to follow a more holistic approach towards assisting investors in developing a financial portfolio based on their personality, existing investment patterns, expectation of returns, and a cohesive view of all aspects of their finances. A broader and more balanced perspective on your financial standing helps in elevating the experience of investing beyond simply making gains to achieving a state of satisfaction with your finances, at any age.
