What is fear of risks?

Definition/Examples of Risk-Aware Investing

A risk-aware investor is one who is more conservative, focusing on preserving capital rather than maximizing profits. Risk-aware investors typically invest more in low-volatility stocks instead of high-growth stocks.

Generally, investors follow the principle that risk is related to returns, and the higher the risk, the higher the potential returns. Risk-aware investors can achieve returns, but they prioritize capital preservation and low-risk assets.

How Risk-Aware Investing Works

Risk-aware investors who wish to maintain their investments must consider the advantages and disadvantages of different investment strategies.

For example, those who want to ensure they do not incur losses may place their money in a savings account or a certificate of deposit (CD).

However, these options typically offer lower returns than other assets. They also pose a different kind of real risk: that their growth may not keep pace with inflation trends. The investor will lose real purchasing power with “lower-risk” investments or strategies. Risk is relative and depends on the investor.

Risk-Aware Investment Strategies

Risk-aware investors looking to preserve their investments should consider the advantages and disadvantages of different investment strategies.

For instance, those wanting to ensure they do not incur losses may place their money in a savings account or a certificate of deposit (CD).

However, these options generally provide lower returns than other assets. They also represent a different type of real risk: that their growth may not keep pace with inflation trends. The investor will lose real purchasing power with “lower-risk” investments or strategies. Risk is relative and depends on the investor.

Let’s explore some common investment strategies that risk-aware investors might follow.

Income Investing

Income investing is when investors aim to invest in a way that provides a regular and reliable income using low-risk assets. They may hold, for example, bonds that preserve capital over the long term with regular interest payments or fixed income.

Bonds can have varying degrees of risk, but they are generally considered less risky than stocks because they are less sensitive to economic risks or geopolitical disruptions.

Government and municipal bonds are considered a safe type of fixed-income asset because governments have the authority to raise taxes to make payments, if necessary. Generally, the interest on these bonds is also tax-exempt.

Investors using a fixed-income approach should be aware of inflation risks, or the risk that the rate of inflation may exceed the fixed amount of income, thereby causing the investor to lose purchasing power.

Value Investing

Value investors aim to buy stocks that are undervalued compared to the company’s true worth, or what they could truly be. The idea is that the prices of these stocks will rise over time once investors recognize their true value.

Value stocks are generally considered less risky than the broad market, but investors should keep in mind that it may take time for a turnaround in the stock to occur, and they have a higher risk of price volatility than growth stocks. Therefore, this strategy is better suited for long-term investors.

Diversification

Investors who diversify their portfolios with a mix of assets reduce risk. You can enhance diversification by investing in different types of assets such as stocks, bonds, and real estate. You can also add diversity by varying the sizes of the companies or industries you invest in.

The idea

It means that if one asset suffers a loss, other assets can help you compensate for those losses. By diversifying, you avoid putting all your money into one asset, thus reducing the risk of overall losses.

What does this mean for individual investors

A risk-averse investor may utilize any number of different investment strategies, but their main goal will be to minimize losses and preserve capital, rather than to achieve large gains.

You should consider that there is no one-size-fits-all strategy for all risk-averse investors as they have different financial situations and investment goals.

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Sources:

– U.S. Securities and Exchange Commission. “Risk Tolerance.”

– U.S. Securities and Exchange Commission. “Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing.”

– U.S. Securities and Exchange Commission. “Municipal Bonds.”

– Bank of America, Merrill Edge. “Growth vs. Value Investing.”

– U.S. Securities and Exchange Commission. “Diversify Your Investments.”

Source: https://www.thebalancemoney.com/what-is-risk-averse-5218562