Playing it safe and steady
What is Risk Averse?
Someone who is risk averse has the characteristic or trait of preferring avoiding loss over making a gain. This characteristic is usually attached to investors or market participants who prefer investments with lower returns and relatively known risks over investments with potentially higher returns but also with higher uncertainty and more risk. A common concept tied to risk, one which compares the risk level of an individual investment or portfolio to the overall risk level in the stock market, is the concept of beta.
Types of Investments Risk Averse Investors Choose
A risk averse investor tends to avoid relatively higher risk investments such as stocks, options, and futures. They prefer to stick with investments with guaranteed returns and lower-to-no risk.
The investments include, for example, government bonds and Treasury bills. Below are two lists that classify lower and higher risk investments. Keep in mind that while the relative risk levels of various types of investments generally remain constant, there can be situations where a usually low-risk investment has a higher risk or vice versa.
Safer, Low-risk Investments
- Bonds
- Certificates of Deposit
- Treasury securities
- Life Insurance
- Investment Grade Corporate Bonds
- Bullet Loans
- ETFs*
In addition to these specific investments, any type of debt instrument issued by a company will generally be considered a safe, low-risk investment. These debt instruments are typically well-suited for a risk averse investing strategy.
These instruments are lower risk at least partly due to their characteristic of absolute priority. In the event of dissolution or bankruptcy of a company, there is a definite order of payback to the company’s creditors and investors. Legally, the company must first pay off debtors before paying off preferred shareholders and common shareholders (equity investors).
Higher Risk Investments
- Stocks
- Penny Stocks
- Mutual Funds
- Financial Derivatives (Options, warrant, futures)
- Commodities
- ETFs*
*Some ETFs come with a higher risk, but most ETFs, especially those invested in market indexes, are considered quite safe, especially when compared to investments in individual stocks. This is because they typically experience relatively lower volatility, due to their diversified nature. Keep in mind, however, that some ETFs are invested in significantly higher risk securities. Hence, the inclusion of ETFs in both the low- and high-risk categories.
Additional Resources
Thank you for reading CFI’s guide on Risk Averse. With that goal in mind, these additional CFI resources will be very helpful:
FAQs
reluctant to take risks; tending to avoid risks as much as possible: risk-averse entrepreneurs.
What does no risk-averse mean? ›
Risk aversion is the tendency to avoid risk. The term risk-averse describes the investor who chooses the preservation of capital over the potential for a higher-than-average return. In investing, risk equals price volatility. A volatile investment can make you rich or devour your savings.
What is the opposite of risk-averse? ›
Risk tolerance is often seen as the opposite of risk aversion. As it implies, you – or more importantly, your financial situation – can tolerate risk, even though you don't necessarily go seeking it.
What is risk-averse personality traits? ›
“On the positive side, if you think about the Big Five personality traits (extroversion, agreeableness, openness, conscientiousness, and neuroticism), people who are risk-averse also tend to be more agreeable and more conscientious,” says Dr. Maier.
Is risk-averse a weakness? ›
Some industries value risk more than others, but often being cautious is a 'weakness' that you can use to your advantage.
How do you know if someone is risk-averse? ›
People that are risk-averse don't like risk. They will do anything they can to reduce risk. In general, these are people that that don't like uncertainty or the unknown. People who are risk averse tend to seek safe investments, even if they don't provide a high return.
Is risk averse positive or negative? ›
The risk premium is the difference between the expected value and the certainty equivalent. For risk-averse individuals, risk premium is positive, for risk-neutral persons it is zero, and for risk-loving individuals their risk premium is negative.
What is a synonym for risk averse person? ›
cautious. She's a very cautious driver. play it safe. I think I'll play it safe and take the earlier train. chary.
Is everyone risk averse? ›
Risk aversion is a common behavior universal to humans and animals alike. Economists have traditionally defined risk preferences by the curvature of the utility function. Psychologists and behavioral economists also make use of concepts such as loss aversion and probability weighting to model risk aversion.
What is the difference between risk avoidance and risk-averse? ›
Note: There is a difference between risk aversion and risk avoidance. For example, a risk averse investor may accept a low degree of risk in an investment selection, whereas risk avoidance would have the investor forgo the investment altogether.
allergic antagonistic hesitant hostile loath reluctant unwilling.
Can you be loss averse and risk-averse? ›
Loss aversion is a pattern of behavior where investors are both risk averse and risk seeking. Risk Aversion is the general bias toward safety (certainty vs. uncertainty) and the potential for loss.
Why most people are risk-averse? ›
Most people tend to let fear stop them in their tracks. They accept everything that they hear as a matter-of-fact and become too afraid to take the risks due to statistics, self-doubt and fear of failure.
What risk-averse people want? ›
A risk-averse person will want to do whatever they can to avoid risk, so they will be willing to pay a very high risk premium. A less risk-averse person will not be willing to pay such a high risk premium as they are willing to take on more risk.
Which personality type takes risks? ›
A first important finding is that all types of risk-taking increased with higher levels of extraversion and neuroticism, openness to experience, self-assurance, and the ability to make decisions. Openness to problem solving and inner balance had a negative impact on risktaking.
What is an example of a risk aversion? ›
Risk Aversion is a heuristic that causes humans to choose the “safer” option when provided with a choice between a riskier, high-payoff option and a safer, low-payoff option. For example, when we are deciding between two all-in-one CRM platforms, we are more likely to pick the option with a satisfaction guarantee.
What is a risk aversion in real life? ›
Risk aversion describes the preference people have when they choose an outcome that's certain over one that's uncertain. Most people dislike ambiguity, and when faced with a tough decision, they'll generally go for the “safer,” risk-free option.
What are the benefits of being risk-averse? ›
One advantage of having a risk-averse mentality is that it provides assured cash flows as they choose low-risk investments because they can expect set and predictable returns. These assets usually have legal agreements attached to them, which provide consistent and predictable profit flows in the form of benefits.
What is the difference between risk seeker and risk-averse? ›
Risk-seeking confers a high degree of risk tolerance, or the amount of potential losses an investor is willing to accept. In contrast with risk-seeking investors, risk-averse investors seek low-risk investments and are willing to accept a lower rate of return because of the desire to preserve capital.
