By MOSHE A. MILEVSKY

Sit back for a moment and ponder something unpleasant: How would a large, sustained drop in the stock market affect your personal finances? More specifically, imagine the Dow Jones Industrial Average hitting 6500—its March 2009 level—and staying there.

I suspect that most of you are thinking about the wretched blow this would deal to your retirement savings and stock portfolio. And it no doubt would. But here's my advice: Think more broadly. Most important, think about how such a drop would affect your paycheck and your career.

It will depend on the person, of course. Earnings in some professions are tightly linked to the stock market—an investment banker, say, or portfolio manager or financial adviser—while others, such as hospital nurses or tenured professors, are relatively immune to these zigs and zags. Most people will fall somewhere in between.

Consider this an exercise in personal risk management. It isn't intended to gauge whether you believe the stock market will test those levels again, and I'm not asking whether you are bullish or bearish. That is not what personal risk management is about, even if it is how most people practice it. The issue here is: If the bear returns for a prolonged visit, regardless of your subjective view of these odds, how would it affect your current and future earning power? And—more important—are you properly considering it when creating your investment portfolio?

I doubt it. In fact, I worry that one of the problems plaguing both investors and their financial advisers is that asset-allocation decisions are based excessively on how people feel (risk-averse or risk-tolerant) and what they believe (bullish or bearish about the stock market) as opposed to how much risk their personal balance sheets can tolerate.

To put it in even more-basic terms: As part of any asset-allocation strategy, you need to determine whether you are a stock, with earnings that can fluctuate wildly with the market, or a bond, with earnings that are less flashy but steady.

You will likely find that the overall level of risk you are taking is much higher or lower than you think.....

I doubt it. In fact, I worry that one of the problems plaguing both investors and their financial advisers is that asset-allocation decisions are based excessively on how people feel (risk-averse or risk-tolerant) and what they believe (bullish or bearish about the stock market) as opposed to how much risk their personal balance sheets can tolerate.

Yet a pair of studies on investor behavior released last week not only showcase the obvious — that investors remain wary about taking on stock-market risk — but make you hope that your dollars as a fund shareholder or taxpayer are not paying to foot the researcher’s bill.

Behind the obvious answers, however, is a real concern, namely that investors are doing what feels good, rather than what most experts believe is right. If you fall into that category, you may want to toughen up and learn from the mistakes of others.

First, the research:

An annual survey by the Investment Company Institute showed that mutual fund shareholders’ overall willingness to take investment risk has not rebounded since the financial crisis of 2008.

Some 30% of fund investors were willing to take substantial or above-average risk trying to register financial gains this May, down from 37% in May 2008, a few months before the financial crisis hit. The ICI, the fund industry trade association, noted that the decline in risk tolerance between May 2008 and May of this year showed up across all age groups, but was more pronounced with older investors, who reported a much lower risk tolerance than their younger peers.

Meanwhile, a University of Missouri study published in the Journal of Economic Issues showed that investors have become wary about taking risks with the stock market while the U.S. economy has been lagging, and that risk behavior has been tied to market returns for a long time.....

“The markets hate uncertainty.”

If you wandered anywhere near a television in advance of the midterm elections, the Federal Open Market Committee meeting or October’s employment report, that cliche was unavoidable. It was the pundits’ preferred proverb.

Wall Street has a sweet tooth for such investing maxims. They infect the trading community like influenza in December. Repeat mindless dictums ad nauseam, and they soon become the accepted wisdom.

The problem with these supposed truisms is they are no more accurate than the flip of a coin. A closer look at this uncertainty meme reveals it to be a false-ism -- one of those emotionally appealing phrases that ping around trading desks. The lack of evidence supporting their premise seems to matter very little.

To recognize how meaningless these statements are, consider the opposite: Could markets function without uncertainty? It takes only a little thought to realize that markets actually thrive on doubt, imperfect information and a lack of consensus.....