In terms of investment, exhibiting risk aversion refers to consumers who avoid securities deemed risky. As a result, individuals who are risk averse typically seek out assets and investment strategies that match their low risk tolerance. However, while less risky financially, this approach to investing can be limiting and rarely offers outstanding returns. Read on as we explain the advantages and disadvantages of risk aversion.
Slow and steady returns
The main advantage of adopting a risk averse strategy is that the chance of experiencing losses is effectively minimised. Investing funds in low-risk products such as fixed-income securities can also offer cash flows you can count on and consistent positive returns in the long term.
Lower overall returns
The downside of a low-risk approach is that it also has low expected returns. The risk-return trade-off doesn’t favour risk averse investors who shy away from riskier assets such as stocks. As a result, risk averse investors typically receive lower total returns overall, especially when looking at long-term investments.
Risk aversion as a trait, can also lead investors to avoid what can be sound opportunities. In extreme cases, they may stay away from markets entirely, which can put them at a clear disadvantage if they are saving for their retirement. Furthermore, inactive money in savings is eroded over time by inflation as it loses its buying power.
For investment advice and portfolio management in Shropshire and Chester, contact our dedicated team today at Hartey Wealth Management.
