Should You Use a Mood Ring to Determine Your Risk Tolerance?

It’s tough not to get moody about lousy financial markets. And it’s easy to let our moods influence the way we feel about the money we already have invested or influence whether we invest more. In fact, our moods influence the way we think about investing in good times and bad. But letting the color of your mood ring dictate your investment strategy is not likely a good recipe for investment success.

Simply put a mood ring changes color in response to changes in body temperature. The mood ring changes color based on body temperature and the colors correspond to different emotions. Wouldn’t it be great if we could just grab our moon ring and figure out how if the time to buy or sell?

As great as it sounds, the problem is that most humans are emotionally hard-wired to do the wrong thing at the wrong time. In other words, we feel the worst about our investment prospects when investments are on sale (a.k.a. when the stock market is down). We feel good about investing when prices are high (a.k.a. when the stock market is up). But buying high and selling low does add up to wealth building.

That’s why we encourage investors to take a risk tolerance quiz to determine what kind of investor they are when the mood ring is green (normal, average, calm). Then consider your time horizon and figure out how to divide your investments across stocks and bonds to achieve the level of risk appropriate for your situation.

Then put the mood ring back in the jewelry box. Markets will go up and down and sometimes they even go sideways. When times are tough and the mood ring is grey (uneasy, anxious), avoid the temptation to give up and run for cover. And when times are good and the mood ring is violet (super excited, extremely happy), don’t expect it will always feel this good.

As Warren Buffet once said, “Someone is sitting in the shade today because someone planted a tree a long time ago.” Rest assured, though, that wouldn’t be possible if someone dug it up and planted another every time they leave withered while waiting for the rain to come and the sun to shine again.