Risk Averse: Definition, Examples & Investment Options (2024)

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Risk-averse investors tend to be conservative in their investment approach, preferring minimal risk and stability, as opposed to more aggressive growth strategies or objectives. Learn more about what it means to be a risk-averse investor.

Risk Averse: Definition, Examples & Investment Options (1)

Risk Averse Meaning

With regard to investing, the term risk-averse generally refers to an investor or category of investors who prefer low-risk investment securities to those associated with higher price volatility. A risk-averse investor tends to align more with the safety of principal objective than a growth objective.

When an investor is risk-averse, they tend to seek low-risk investments, which will typically produce low but more stable returns. For example, a risk-averse investor may accept some fluctuation in price in exchange for returns that can outpace inflation by a small margin. This would require taking on some market risk, specifically some short-term price fluctuation, but this risk would preferably be low compared to a stock investment.

Important: No matter what the degree of 'safety' associated with an investment security, all forms of investing generally require the investor to assume some degree of risk. For example, a US Treasury bond is widely considered to be a 'safe' investment because the security is backed by the full faith and credit of the US government. However, although the credit risk is extremely low, the inflation risk (i.e. the risk that the market price of the bond can go down in a rising interest rate environment) is still present.

How Risk Aversion Works

Risk aversion, as it is associated with investing, generally involves the reduction or minimization, but not necessarily the complete removal, of individual security or market risk to achieve an investment goal, strategy, or objective. Thus, risk aversion can be described as a priority or preference for an investor, rather than an absolute avoidance of risk.

Risk aversion may also be situational and not consistent across all of an investor's savings and investing goals. Thus, it depends upon the investor's tolerance for risk and the investor's specific goals in a given situation or account type.

For example, an investor may be risk-averse with their short-term investments, such as those used for goals with time horizons of less than three years. However, the same investor may be comfortable taking more risk with long-term investments, such as retirement or other goals, with time horizons longer than 10 years.

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.

Examples of Risk-Averse Behavior

Risk aversion is related to the behavioral economics concept known as loss aversion, which holds that for most people, "losses loom larger than gains" (behavioraleconomics.com). That means that for these investors, the pain of losing tends to be much more powerful than the pleasure of gaining. For this reason, a risk-averse investor may select investments with minimal risk, even though such investments are expected to produce lower returns.

Examples of risk-averse behavior are:

  • An investor who puts their money into a bank account with a low but guaranteed interest rate, rather than buy stocks, which can fluctuate in price but potentially earn much higher returns.
  • A young, healthy person buying a life insurance policy, although the risk of dying prematurely is extremely low for them.
  • On the game show, "Deal or No Deal," a contestant chooses to accept the guaranteed winning amount, such as $100,000, rather than take an unknown risk to win a much higher pot, such as $250,000, even though they came to the show risking none of their own money.

Investments for Risk-Averse Investors

Risk-averse investors tend to buy investments or use account types that are associated with safety or low market risk. Investment types that risk-averse investors tend to buy include US Treasury bonds, high credit quality municipal and corporate bonds, conservative allocation funds, dividend-paying stocks, certificates of deposit, and savings accounts.

  • US Treasury bonds: Guaranteed by the full faith and credit of the United States government and extremely low risk of default.
  • High quality municipal and corporate bonds: Municipal bonds are typically issued by state or local governments and corporate bonds are issued by corporations. High quality refers to credit quality, which implies low risk of default by the issuing entity.
  • Conservative allocation funds: Diversified mutual funds or ETFs that typically consist of an asset allocation of roughly 30-50% stocks, 40-60% bonds, and 5-10% cash.
  • Dividend-paying stocks: Tend to produce more stable returns than growth stocks but can still see significant price fluctuation.
  • Certificate of deposit (CD): Most commonly offered by banks, CDs are deposit accounts that pay fixed interest rates for a specified period of time. CDs are insured by the Federal Deposit Insurance Corporation (FDIC), up to $250,000 per account owner, per financial institution.
  • Savings accounts: Highly liquid, interest-bearing deposit accounts offered at banks. FDIC insurance guarantees the deposit up to $250,000 per account holder.

Bottom Line

Risk-averse investors tend to seek low-risk investments, which typically produce low but more stable returns. Risk aversion is not the same as risk avoidance. This means that a risk-averse investor may be willing to invest in securities that are not guaranteed, as long as the investments suit their low-risk objective.

Kent Thune

Kent Thune, CFP®, is a fiduciary investment advisor specializing in tactical asset allocation and portfolio management with a focus on ETFs and sector investing. Mr. Thune has 25 years of wealth management experience and has navigated clients through four bear markets and some of the most challenging economic environments in history. As a writer, Kent's articles have been seen on multiple investing and finance websites, including Seeking Alpha, Kiplinger, MarketWatch, The Motley Fool, Yahoo Finance, and The Balance. Mr. Thune'sregistered investment advisory firmis headquartered in Hilton Head Island, SC where he serves clients all around the United States. When not writing or advising clients, Kent spends time with his wife and two sons, plays guitar, or works on his philosophy book that he plans to publish in 2024.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Risk Averse: Definition, Examples & Investment Options (2024)


Risk Averse: Definition, Examples & Investment Options? ›

Risk aversion is the tendency to avoid risk and have a low risk tolerance. Risk-averse investors prioritize the safety of principal over the possibility of a higher return on their money. They prefer liquid investments. That is, their money can be accessed when needed, regardless of market conditions at the moment.

What is an example of a risk averse investor? ›

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.

What is risk averse in real life example? ›

In another example, a middle-aged couple may choose to put their money in a very low-interest savings account rather than invest in higher-risk stock. They are closer to retirement and afraid to risk financial security later in life, so this makes them more risk-averse.

What do risk averse investors require? ›

Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.

What is an example of risk adverse? ›

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 is risk aversion in investment? ›

Risk aversion is the tendency to avoid risk and have a low risk tolerance. Risk-averse investors prioritize the safety of principal over the possibility of a higher return on their money. They prefer liquid investments. That is, their money can be accessed when needed, regardless of market conditions at the moment.

What does risk-averse mean simple? ›

/ˈrɪsk.əˌvɝːs/ 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. risk-averse investors.

What do risk-averse people do? ›

Risk averse means someone who is choosing options and making decisions that will limit loss. They are making choices depending on how much risk is involved. If it is too much risk that person will make a more conservative choice with predictable results.

How should someone who is risk-averse allocate his investments? ›

Risk-averse investors often choose index funds because they track market indexes, which increase in value over time with potential losses and gains that are less volatile than funds that don't track market index patterns.

Which form of stock is best for a risk-averse investor? ›

Dividend-paying stocks are considered safer than high-growth ones as they minimize volatility, if not eliminate it. You don't depend on the value of the stock as you get a dividend as a regular income on your investment.

Why are most investors risk-averse? ›

These investors seek to preserve the real value of their capital, rather than to increase the real value of their capital. Their willingness to take risks and decisions to initiate, amend or terminate risky behaviours are influenced by endogenous and exogenous factors.

Which type of investment will a risk-averse investor most likely invest in? ›

However, there are a number of lower-risk investments suitable for risk-averse individuals, including traditional bank accounts, government securities, corporate and municipal bonds, and preferred stock.

What is the most appropriate characteristic of a risk-averse investor? ›

The term risk-averse describes the investor who prioritizes the preservation of capital over the potential for a high return. Upside refers to the potential increase in value, measured in monetary or percentage terms, of an investment.

How do you use risk-averse? ›

Being Able to Generate a Steady Income

Being risk averse makes it possible to create a steady stream of income as these individuals value reliable returns above high-risk, high-reward efforts and choose low-risk investments like bonds, dividend-paying equities, or fixed-income assets.

What is an example of a loss aversion investor? ›

Examples of Loss Aversion

Selling a stock that has gone up slightly in price just to realize a gain of any amount, when your analysis indicates that the stock should be held longer for a much larger profit. Telling oneself that an investment is not a loss until it's realized (i.e., when the investment is sold)

What is an example of a risk investment? ›

While the product names and descriptions can often change, examples of high-risk investments include: Cryptoassets (also known as cryptos) Mini-bonds (sometimes called high interest return bonds) Land banking.

What is an example of a risk neutral investor? ›

An example of risk neutral would be an individual who's indifferent between 1) a 100% chance of receiving $1,000, versus 2) a 50% chance of receiving $2,000, and a 50% chance of receiving nothing. In both cases, the expected value would be $1,000, after calculating for both probability and return.

What are risk seeking investors examples? ›

While most investors are considered risk averse, one could view casino-goers as risk-seeking. A common example to explain risk-seeking behaviour is; If offered two choices; either $50 as a sure thing, or a 50% chance each of either $100 or nothing, a risk-seeking person would prefer the gamble.


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