Risk Aversion May Decide Where Investments Go
When looking to invest, it is important to decide how risk averse you are as a person.People who highly risk averse will look for investments that are low risk and those who have a low risk aversion can invest in options that have a higher rate of return and a higher risk of loss of value.
Psychologically, there are many factors that affect risk aversion includingage, natural tendency and the amount of money a person has available to invest.As people age, they naturally become more conservative and will become more risk averse.A person in his or her twenties might well accept a greater risk when investing because they have a longer time to recoup any possible losses.A person in his or her sixties, however, will probably want a less risky investment because that person is closer to needing access to those funds and a great loss would be devastating to his or her retirement plans.
Some people are born risk takers.These are the people who, as kids, were the first to go down the slide.They liked to swing and jump off when they were done swinging.They spun like tops until they were so dizzy that they fell down.Risk aversion can be learned and unlearned, but it is sometimes hard to overcome one's own nature even after repeatedly experiencing negative effects of risk taking.Risk takers are willing to put their money into investments that are high risk and high yield.It can be because they just don't care or just for the fun of it.
Those who are born risk averse may have been the children that were more comfortable in the library than on the playground.They had few friends and loved to read.These types of people again can learn to overcome risk aversion, but in general, they are going to be more comfortable with doing what is safe and that may include the safest possible investment with a guaranteed return.
These are, of course broad generalizations, and not all people who like libraries and have few friends are risk averse; just like, not all outgoing sports type are risk takers.
The amount of money that a person has to invest may also create risk aversion or risk taking.Because people with a lot of money can invest in a wide variety of areas, they can limit their risk by spreading their money over a large number of investments that rank from high risk, high reward to low risk, low reward.A normally risk averse investor may decide to put 15 to 20 percent of his or her available funds into a risky investment because he or she believes that it is an amount of money that can be lost with no perceived damage to his or her future net worth.This type of motivation is risk taking, but only because the less risky investments provide protection to the person who is risk averse.
Someone who has very little money to invest will probably decide to keep it in less risky investments for a couple of reasons, regardless of how much of a risk taker that person may be in other areas of life.When someone has very little money, the loss of any of that money is a huge blow to that person's financial situation.If a millionaire loses $20,000, it isn't a big deal.If someone who makes $30,000 a year loses $20,000 that becomes a loss of eight months' worth of wages.That kind of loss could make anyone wary of anything but the safest of investment opportunities.