The curious case of Benjamin Button
Have you seen the movie, the curious case of Benjamin Button? The one with Brad Pitt where he ages in reverse? Believe it or not, we all are Benjamin when it comes to our finance world. Confused, let me explain: Our risk appetite decreases with age but we do the opposite (like Benjamin). We tend to take more risks when we can’t afford them.
In our 20’s when we start earning there are no major responsibilities. This allows us to invest aggressively and take the risks to build a nest egg that grows over decades. Instead, we keep the money stored in our bank accounts. It’s a conclusion backed up by a number of studies, including a 2016 analysis by Lindsay Larson, an assistant professor of marketing at Georgia Southern University’s College of Business Administration. The reason is simple; we don’t have the knowledge or the needed patience.
Risk appetite: High Knowledge: Low
By our 30’s we are usually married with a kid. There are a lot of responsibilities such as car loan, home loan, saving for child’s education, emergency, retirement, medical bills etc. Also, did you look at the prices of the latest phone and Mac book?
At this time we can’t really afford to take huge risks and invest heavily. We should go for safer options but did you look at the payments you have to make at the end of the month? We end up tangled in the complexities of all the options we can invest in for the information is flowing from various channels.
By our forty’s the children are ready for college but there is not enough saving. So, we fish out the retirement money or worse add up new loans on the list. The risk taking appetite is low and the knowledge is high.
By 50’s, it’s time to marry the children. But the education loan is still piled up and there are not much funds in retirement kitty. It takes an average 10-30 lakh for a wedding but it happens once, right? You have experiences and knowledge to help you invest in the market but no risk taking appetite or enough funds.
Risk appetite: Low Knowledge: High
And by our retirement age, we find out there is not enough money for all the medical bills and a good life without earning anything.
Now if you had started planning in your 20’s for every big spender you can imagine, and worked your risk appetite accordingly the movie credits would have been a picture of you enjoying in the Bahamas.
PS: Knowledge can be gained, risk appetite can’t be.