Forget the traditional wisdom that covets seeking out new investments in the hunt for growth and rely on plucking high dividend shares instead, urges a behavioural economist.
King Fuei Lee, Head of Asia Equities, at Schroders Singapore, reckons fund managers and analysts have got the wrong message for aging investors.
He argues that they do not want growth but simply want to invest for income to make their lives more comfortable.
The reason is they have nowhere else to shelter their cash due to inflation and miserly interest rates paid by banks.
Even though more lucrative investments are available, they are not interested because they just want the money and not the risk or long-term commitment that comes with a better return.
Lessons from behavioural economics
Behavioural economics is the key to understanding these investors, he says.
The theory says that in the retirement life cycle, investors spend more in the years after they retire as they are more active, then this spending slows as they become less fit and then increases again as they need to pay for carers in old age.
“As people retire they tend to spend their cash out of income they receive rather than growth on assets they hold,” said King Fuei Lee.
“Their money comes from earnings not assets. This means they tend to favour stocks paying good dividends over those that pay lower dividends but grow in value over the long term.
“That’s why so many buyers chase stocks with high returns even though they are written-off as overpriced by commentators.”
Helping aging investors
King Fuei Lee also explained these stocks are so popular because the populations of many developed countries, especially in Asia, have a high proportion of aging investors who want income over growth.
As a behavioural economist, he believes financial firms should be using the result of research to design better products and services for aging investors so they can have easier access to the stocks they prefer.
He also explains factors like deflation, inflation and interest rates do not really affect the behaviour of aging investors while high-yielding stocks are available, they will buy them.