Young and cautious

Think younger investors are more willing than their parents to assume risk? Think again.

Generational differences may not significantly affect risk tolerance, according to a recent paper by Rui Yao, an assistant professor of personal financial planning at the University of Missouri, which was published in the Journal of Socio-Economics.

The study analyzed data from the 1998-2007 Survey of Consumer Finances, a project overseen by the University of Michigan using Federal Reserve and Internal Revenue Service data. The paper quantified how age, market environment and generation affect risk tolerance.

Ms. Yao and her co-researchers found that Generation Xers (born between 1965 and 1975) are not as daring as their life experiences — which include living through the strong markets of the 1990s and the growth of the Internet — might suggest.

Advisers need to understand the types of risks these younger clients view as too extreme, she said, and be aware that risk tolerance changes over time. The study also found that investors of all ages get greedier as markets do well.

“When markets are booming, investors are more accommodative of risk, and that’s not good,” Ms. Yao said.