Feel a slight pain in your chest while you’re reading the stock pages or your RRSP statement?
If the market has been sagging, there’s no coincidence. A recent preliminary study by researchers at Duke University discovered an increase in heart attacks after the recession began deflating stock prices in December 2007. When the market turned around, the incidence of heart attacks decreased.
This confirms something I’ve always believed; some of us simply aren’t cut out for the rigours of being a stock market investor.
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When the market is rising, as it has been steadily for the past year, everyone is a steely-nerved market pro. But when the market slides a surprising number of people head for the windows.
The market term for this emotional reaction to your bottom line is risk tolerance. Advisers attempt to determine where you fit on the risk tolerance scale with a series of boilerplate questions. But it is an infernally difficult thing to measure, even for the most conscientious advisers. Certainly a handful of general questions aren’t going to reveal what investors often don’t know about themselves — just how much risk can I handle?
Most people are less than half as brave as they think. If you believe you can tolerate 50 per cent of your portfolio in stocks or equity mutual funds held in RRSPs, RRIFs or non-registered accounts you should start with 25 per cent or less. You can always increase it, but reducing your exposure after an anguishing market tumble is like shutting the barn door after the horses have bolted.
Also, I’m convinced that 10 to 25 per cent of investors are temperamentally unsuited to any stock market investment. They simply can’t cope with the volatility, no matter what the potential gain.
You may be wondering why I’m bringing this up since the market has been so buoyant. Last week’s rise in the Consumer Price Index signals the possibility of interest rate increases, which historically tend to dampen the market.
The Duke University study reveals that investing isn’t just about the money. What good is a portfolio if you aren’t alive to enjoy it?
– Alison Griffiths is a financial journalist, author and host of Maxed Out on the W Network. Write to her at email@example.com.