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 in investing risk equals price volatility a volatile investment can make you rich or devour your savings a conservative investment will grow slowly and steadily over time low risk means more stability a low risk investment guarantees a reasonable if unspectacular return with a near zero chance that any of the original investment will be lost generally the return on a low risk investment will match or slightly exceed the level of inflation over time a high risk investment may gain or lose a bundle of money risk averse can be contrasted with risk seeking investopedia michela buttignolunderstanding risk aversethe term risk neutral describes the attitude of an individual who evaluates investment alternatives by focusing solely on potential gains regardless of the risk that may seem counter intuitive to evaluate reward without considering risk seems inherently risky nonetheless offered two investment opportunities the risk neutral investor looks only at the potential gains of each investment and ignores the potential downside risk the risk averse investor will pass up the opportunity for a large gain in favor of safety risk averse investors typically invest their money in savings accounts certificates of deposit cds municipal and corporate bonds and dividend growth stocks all of the above except for municipal and corporate bonds and dividend growth stocks virtually guarantee that the amount invested will still be there whenever the investor chooses to cash it in dividend growth stocks like any stock shares move up or down in value however they are known for two major attributes they are shares of mature companies with proven track records and a steady flow of income and they regularly pay their investors a dividend this dividend can be paid to the investor as an income supplement or reinvested in the company s stock to add to the account s growth over time risk averse investors also are known as conservative investors they are by nature or by circumstances unwilling to accept volatility in their investment portfolios they want their investments to be highly liquid that is that money must be there in full when they re ready to make a withdrawal no waiting for the markets to swing up again the greatest number of risk averse investors can be found among older investors and retirees they may have spent decades building a nest egg now that they are using it or planning on using it soon they are unwilling to risk losses risk averse investment productshigh yield savings account from a bank or credit union provides a stable return with virtually no investment risk the federal deposit insurance corp fdic and the national credit union administration ncua insure funds held in these savings accounts up to generous limits 12the term high yield is relative however the return on the money should meet or slightly exceed the level of inflation risk averse investors who don t need to access their money immediately could place it in a certificate of deposit cds typically pay slightly more than savings accounts but require the investor to deposit the money for a longer period of time early withdrawals are possible but come with penalties that may erase any income from the investment or even bite into the principal a key risk faced by investors in a cd is reinvestment risk this is when interest rates fall and when the cd matures the investor s only option for a cd is at lower rates than before there can also be bank failure risk if the value of the cd is greater than 250 000 cds are particularly useful for risk averse investors who want to diversify the cash portion of their portfolios that is they might deposit some of their cash in a savings account for immediate access and the rest in a longer term account that earns a better return a money market fund is a type of mutual fund that invests in high quality short term debt instruments cash and cash equivalents these funds are very low risk and are structured so that each fund share is always worth 1 00 because they are conservative they tend to pay relatively low rates of interest to investors treasury securities or the debt issued by the u s federal government are considered to be the safest of all securities investors can access treasuries via mutual funds or etfs or directly through the government s treasurydirect website state and local governments as well as corporations also routinely raise money by issuing bonds these debt instruments pay a steady interest income stream to their investors bonds also tend to offer lower risk than stocks note that bonds do come with risks russia defaulted on some of its debts during a financial crisis in 1998 3 the global financial crisis of 2008 2009 was partially caused by the collapse of bonds that were backed by mortgages made to subprime borrowers 4notably the agencies tasked with rating those bonds should have assigned them ratings that reflected the risks of the investments they were junk bonds marketed as safe bonds risk averse investors buy bonds issued by stable governments and healthy corporations their bonds get the highest aaa rating in the worst case bankruptcy scenario bondholders have first dibs on repayment from the proceeds of liquidation municipal bonds have one edge over corporate bonds they are generally exempt from federal and state taxes which enhances the investor s total return dividend growth stocks can appeal to risk averse investors because their predictable dividend payments help offset losses even during a downturn in the stock s price in any case companies that increase their annual dividends each year typically don t show the same volatility as stocks purchased for capital appreciation many of these are stocks in so called defensive sectors that is the companies are steady earners that aren t as severely affected by an overall downturn in the economy examples are companies in the utilities business and companies that sell consumer staples investors generally have the option of reinvesting the dividends to buy more shares of the stock or taking immediate payment of the dividend permanent life insurance products like whole life and universal life come with cash accumulation features tax advantages and living benefits that make them attractive for risk averse investors cash value in a life insurance policy cannot ever lose value and grows over time policy owners can withdraw or borrow against that cash value at any time but this may reduce the policy s death benefit amount risk averse investment strategiesin addition to individual assets or asset classes that cater to risk averse investors there are also a number of risk averse investment strategies that can be employed to minimize losses one way is through diversification of your portfolio diversification means including assets and asset classes that are not highly correlated with one another this way you are not putting all of your eggs into one basket and if some securities fall in a given day others may rise to offset those individual losses mathematically diversification allows you to maximize your expected return while minimizing your overall portfolio risk income investing is another strategy that focuses on holding bonds and other fixed income securities that generate regular cash flows as opposed to seeking capital gains investment income is especially useful for retirees who no longer have employment income and cannot afford to experience losses in the markets income investing does come with certain other risks such as due to inflation or negative credit events bond and cd laddering along with inflation protected securities can help lower your overall fixed income portfolio risk saving is very low risk but it is not investing investing means that your money is inherently at risk whether you are buying a stock or lending money in the form of a bond advantages and disadvantages of being risk averseexhibiting risk aversion means to shy away from risk and in terms of investing means avoiding risky securities risk averse individuals should seek out investments and strategies that fit this low risk tolerance as such one advantage is that the risk of losses are minimized investing in low risk products like fixed income securities can also mean guaranteed cash flows and constant positive returns over time however with low risk comes low expected return in fact the risk return tradeoff does not favor a risk averse investor who shies away from stocks and other risky assets such risk averse investors will tend to enjoy lower total returns especially over long time horizons risk aversion can also lead people to irrationally avoid otherwise good opportunities and may stay away from the markets entirely putting them at a disadvantage when saving for things like retirement moreover money kept idle in savings or under the mattress will lose buying power over time as it is eroded by inflation minimizes risk of lossescan generate steady incomeguaranteed cash flowsmuch lower expected returns especially over timemissed opportunities opportunity cost inflation erodes buying power of savings