Every investment involves risks. However, the degree of these risks can vary. There are low-risk investments and high-risk investments. While some investors prefer high-risk investments, others choose to play safe by going for low-risk investments. Risk-averse is an investment term used to describe investors who choose to play safe by going for low-risk investments.
What Is Risk Averse? The Why and who
Risk-averse refers to an investor or a group of investors who prefer to go for low-risk investments over high-risk investments. Basically, they tend to focus more on safety during investment instead of on growth. In investing, risk is equivalent to price volatility. A volatile investment can either make you rich or consume your savings. However, conservative investments tend to grow slowly and steadily over a period.
When an investor is risk-averse, the investor tends to look out only for low-risk investments. These types of investments typically produce low but more stable returns.
What type of investments do Risk-Averse investors choose?
Risk-averse investors purchase investments or use account types that are attributed with safety or low market risk. Usually, they invest their money in certificates of deposit (CDs), savings accounts, dividend growth stocks, and municipal and corporate bonds. These are some examples of stable investment securities. Basically, all these investments except for dividend growth stocks, and municipal and corporate bonds, guarantee that the capital invested will remain untouched whenever the investor decides to cash it in.
Just like any other stock shares, dividend growth stocks tend to fluctuate in value. However, this type of investment is well known for two major attributes. Usually, they are shares of developed companies with credible track records and a stable flow of income. Also, they pay their investors a dividend at regular intervals. These companies can pay their investors a dividend as an income supplement or it can be reinvested back in the company’s stock.
What are the attributes of Risk averse?
Risk-averse investors are generally known as conservative investors. Basically, they are unwilling to tolerate volatility in their investment portfolios. Also, they prefer their investments to be highly liquid. This means that the money must always be there in full whenever they are prepared to make a withdrawal. They do not like to wait for the market prices to go up again.
What are some examples of Risk-Averse Investments?
Here are some good examples of risk-averse investments:
1. Savings Accounts
Savings accounts are high-yield savings accounts from a bank that offers a stable return with practically no investment risk. However, the phrase “high-yield” is relative. The return you get on the money should just meet or slightly surpass the level of inflation.
2. Municipal and Corporate Bonds
State and local governments and companies regularly raise funds by issuing bonds. Basically, these debt instruments provide a stable interest income stream for their investors. Also, bonds tend to offer a considerably lower risk than stocks, which makes them suitable for investors who prefer risk aversion.
3. Dividend Growth Stocks
Dividend growth stocks are appealing to risk-averse investors because of their predictable dividend payments. Basically, these payments help to compensate for losses even when there is a drop in the stock’s price.
4. Certificates of Deposit
Risk-averse investors who do not want to access their money instantly can put it in a certificate of deposit. Basically, CDs pay slightly more than savings accounts but it needs the investor to deposit funds for a longer period. Although early withdrawals are possible, they come with sanctions that can wipe out any income you get from the investment.
Risk-averse investors prefer to pursue low-risk investments, which usually produce low but more stable returns. There are several investment securities with low-risk, which have been listed above. However, you should note that risk aversion is not the same as risk avoidance. While the former is willing to make low-risk investments, the latter avoids all kinds of investments with risks.
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