Risk Averse

Playing it safe and steady

What is Risk Averse?

Someone who is risk averse has the characteristic or trait of avoiding risk. This characteristic is usually attached to investors or market participants who prefer investments with lower yields and relatively known risks, over investments with higher yield but higher uncertainty. A common concept tied to risk is the concept of beta.

 

Risk Averse

 

What type of investments to Risk Averse investors choose?

A risk averse investor may avoid high-risk investments, such as stocks, options and futures. They prefer to stick to investments with guaranteed returns and lower-to-no risk. These investments are, for example, government bonds and treasury bills. Below are two lists that classify lower and higher risk investments. Keep in mind that, although these investments are classified as such, there can be situations where a usually low risk investment has a higher risk, or vice versa.

 

Safer, low-risk investments

  • Bonds
  • Certificate 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 a safe, low risk investment. These debt instruments or derivatives are typically suiting for a risk averse investment strategy.

These instruments are lower risk due to absolute priority. In the event of dissolution or bankruptcy of a company, there is an indefinite order of pay back to the company’s liabilities. The company will first pay of debtors before paying off preferred shareholders and common shareholders.

 

Higher risk investments

  • Stocks
  • Penny Stocks
  • Mutual Funds
  • Financial Derivatives (Options, warrant, futures)
  • Commodities
  • ETFs*

*Some ETFs are higher risk, but generally ETFs are quite safe, especially when compared relative to stocks. This is because they are lower volatility, due to their diversified nature. Keep in mind, however, that different ETFs contain different baskets of stocks, and one ETF may contain higher risk than the other.

 

Additional resources

Thanks for reading this guide to understanding what it means to be risk averse.  CFI’s mission is to help you advance your career.  With that goal in mind, these additional resources will be very helpful:

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