"At its face, it seems fairly obvious that investors would be less risk tolerant when the stock market is underperforming," Guillemette said. "However, this may lead to investors buying when the stock market is high and selling when the market is low. If an investor is only buying when the stock market is up, they are limiting potential returns they could earn from their investments."
For his study, Guillemette and co-author
"Also, we found that while risk tolerance followed trends in the stock market, risk tolerance didn't change as much as the stock market," Guillemette said. "So when the stock market dropped by about 50 percent during the recent global financial crisis, risk tolerance dropped by about 7 percent. What this tells us is that risk tolerance is very dependent on the traits and personalities of each independent investor."
To help offset this trend, Guillemette recommends that financial planners create a written investment policy statement with each client that focuses on long-term goals before the client is hit with the panic of a falling market. He also recommends that financial planners work to convince their clients not to look at investment returns too often, as it will help prevent them from selling stocks when the market falls.
"Investors should only purchase stocks for long-term goals like retirement funding," Guillemette said. "Television networks like
Keywords for this news article include: Economics, U.S. Economy, Economy of The U.s.,
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