In life, being a risk-averse person can sometimes be limiting. However, risk management can really improve your chances of being a successful investor.
When it comes to investing, there’s a misconception that you have to constantly make risky moves in order to succeed. A gung-ho attitude can occasionally pay off, but many people do better using a more measured approach with their investments.
What does it mean to be risk-averse?
If you’re risk-averse, you like to reduce the amount of risk you take on when making a decision. It doesn’t mean that you never take any action.
When it comes to finance and investing, you may try and minimise your risk for a number of reasons. If lower levels of risk are your preference, it doesn’t mean you won’t be successful at investing.
Some of the most successful investors in the world are people who don’t expose themselves to too much risk.
Why could being risk-averse be good for investing?
When it comes to investing, risk management is often related to price volatility:
- Lower risk investments tend to be more stable. The price doesn’t move too often and when it does, the price change is quite small.
- Higher risk investments are more unstable. The price may go up and down a lot, and when the price moves, it might do so in large amounts.
Volatile and risky investments may increase in price by a large amount, but they can also drop by an equally large amount.
Being risk-averse might reduce the odds of making large and fast gains but there it also reduces the chance of losing money. Sometimes, it can be better to consistently make small gains than have amazing performances that are wiped out by equally amazing losses.
What investing strategies would a risk-averse person use?
Creating a diversified portfolio can lower your risk. This is because you are spreading out your investments across different companies, industries, and assets. So if one area is unsuccessful, it doesn’t completely destroy your portfolio. Using a diverse approach can also give you a better chance of picking out winning investments.
Focusing on investments that pay dividends might also be useful. These tend to have less volatility, paying out a more predictable rate of return.
Do you need to take on lots of risk when investing?
There is usually at least some risk involved if you want to become an investor.
The amount of risk will depend on the type of investment. Sometimes, accepting a greater level of risk could lead to greater rewards.
An example of this would be investing in bonds from an emerging economy. You may receive a higher interest rate but you also accept a greater chance that the bond won’t be paid back.
Being more risk-averse and resilient is why women often make better investors than men. Keeping steady and not acting on impulse can really improve your chances of success.
It’s important to remember that you only have to accept a level of risk that you’re comfortable with. You don’t have to make risky investments in order to be a profitable investor.
Risk management is always a balancing act. Sometimes a bird in the hand is worth two in the bush. Over the long-term, being risk-averse and having reliable returns can provide a better outcome than volatile investments.
Using the power of time and compound interest, steady investments can really build up. A low-risk approach can also lead to a more dependable source of income once you start living off your investment proceeds.
Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.