COLUMBIA, MO – Taking risks in life can be scary, but it can be especially intimidating right now. The COVID-19 pandemic has caused many to struggle not only physically and emotionally, but also financially. In fact, according to a Pew Research Center poll, roughly four in 10 adults say they or someone in their household has lost their job because of COVID-19.
Like many Americans, Abed Golam Rabbani, an assistant professor in the Department of Personal Financial Planning of the University of Missouri College of Human Environmental Sciences, was tempted to adjust his financial portfolio and divest many of his stocks when the pandemic hit. He was compelled to decrease the amount of risk he was taking on. Ultimately, he resisted these urges, but he wanted to see how the pandemic was affecting others’ ability to keep taking on the financial risk that comes along with being invested in common high-risk stocks.
In a recent study he and his colleagues found evidence that people are moving away from taking financial risks during the pandemic. The study analyzed how the pandemic affected people’s risk tolerance or their ability to take on financial risk, like purchasing certain stocks. Rabbani said that when someone’s risk tolerance is decreased, it has a very practical effect on the economy.
“It translates into their investment,” Rabbani said. “They’re telling their financial planner, I can’t take much risk right now, and they end up selling their high-risk stocks and investing in lower-risk stocks. Because their risk tolerance has lowered, it’s possible their portfolios could lose value over time because low-risk stocks often result in low returns and high-risk stocks tend to have high returns. As a result, you may not meet your retirement goals.”
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One group, however, has been particularly affected by the pandemic. Though young people are generally more risk tolerant, the risk tolerance of people aged 25 or younger decreased at a much greater level than everyone else. Rabbani said this could be an issue for young people.
“Risk-taking activities — driven in part by a willingness to take on a financial risk — leads to greater wealth accumulation,” Rabbani said. “If young people, in general, have reduced their willingness to take financial risk, the wealth accumulation possibilities for them may be in jeopardy. So, young people who are moving away from investing in risky assets are more likely to miss out on higher investment return.”
Instead of adjusting their portfolios based on current events, Rabbani argued that it is best for people to determine their reasoning for investing in the first place. He also said that there are drawbacks to people shifting their investments often.
“When you invest in the stock market, you should invest with a long-term goal in mind,” Rabbani said. “If you change your allocation, there will be service charges, investment charges, and others, and overall, it will have a negative impact on your assets. I think many people have made hasty decisions.”