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
What Is Risk Averse? 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.
What are examples of risk-averse people? ›
For example, a risk-averse investor might choose to put their money into a bank account with a low but guaranteed interest rate, rather than into a stock that may have high expected returns, but also involves a chance of losing value.
What do you call a person who is risk-averse? ›
cautious. She's a very cautious driver. play it safe. I think I'll play it safe and take the earlier train. chary.
What is the opposite of risk-averse? ›
What's the opposite of risk averse? Risk tolerance is often seen as the opposite of risk aversion.
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? ›
Risk-Averse: If a person's utility of the expected value of a gamble is greater than their expected utility from the gamble itself, they are said to be risk-averse.
Are risk-averse people poor? ›
Risk aversion, or preference for low-yield but more certain financial options over high-yield but less certain financial options, has been associated with negative financial outcomes (Finke and Huston, 2003) such as lower net worth and less retirement savings (Bernheim et al., 2001; Finke and Huston, 2003; Watson and ...
What causes a person to be risk-averse? ›
Fear-Conditioning. Over time, individuals learn that a stimulus is not benign through personal experience. Implicitly, a fear of a particular stimulus can develop, resulting in risk-averse behaviour.
What is a risk-averse personality type? ›
Among those preferring Extraversion, those who also had a Feeling preference were more risk-averse than those with a Thinking preference. In other words, leaders preferring ESFP, ESFJ, ENFP, and ENFJ were more likely to be risk-averse than those with preferences for ESTP, ENTP, ESTJ, and ENTJ.
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.
Risk-averse behaviour refers to a tendency to avoid situations that involve uncertainty or the potential for negative outcomes. This type of u is often motivated by a desire to minimise potential losses or negative consequences.
What is risk-averse attitude? ›
Risk aversion is a type of attitude where an individual gravitates toward certain, as opposed to uncertain, events. Risk seeking is a type of attitude or behavior where a person is inclined to take on less-certain activities in lieu of more certain ones.
What is downside risk averse? ›
Downside risk aversion (downside RA) and decreasing absolute risk aversion (DARA) are different concepts that describe preferences for which the harm from bearing risk is lessened by an increase in wealth.
What does excessively risk-averse mean? ›
unwilling to take risks or wanting to avoid risks as much as possible: He feels modern attitudes to children's play are too restrictive and risk-averse.
What does it mean to be risk-averse in Quizlet? ›
A risk averse individual is the one who prefers less risk for the same expected return. • Most investors are risk averse. • Risk-averse investors reject investment opportunities with a risk premium of zero or less.
What is the difference between risk seeker and risk-averse? ›
Risk-averse individuals tend to avoid taking risks and would instead settle for a less rewarding but certain decision and forego a riskier but more rewarding choice. On the other hand, risk-seeking individuals tend to work with higher uncertainties and have made peace with potential losses.
