Risk-averse is a term in the investment world. What is risk-averse, and what are the advantages of using this risk-averse method? Check out the reviews here!
When you become a trader or investor, you must first understand the risks!
Risk-averse is a term in the investment world. What is risk-averse, and what are the advantages of using this risk-averse method? Check out the reviews here!
What is Risk Averse?
A risk-averse is a conservative investor who will avoid risk. This type of investor usually chooses low-risk investment instruments or options to minimize the risk of loss.
This risk-averse investor tends not to take risks even though his returns will be lower.
This type of investor will prefer instruments or styles of investments such as certain bonds, savings accounts, and certificates of deposit.
The difference between Risk Averse and Risk Taker
Risk-seeking investors are the opposite of risk-averse investors. This type of investor will choose to invest in investment instruments with high risk and can provide the same potential profit (high-risk, high return).
Examples of instruments commonly chosen by risk-seeking investors include stocks, stock mutual funds, mixed mutual funds, forex, or crypto assets.
Unlike the risk-averse type, this type of investor is also often called an aggressive risk investor.
How Does Risk Averse Work?
This risk-averse type will be very suitable for investors who want to avoid the risk of loss and prioritize security so that their investment capital can return.
At some point, there are many people who, in their investment journey, have a low tolerance for risk.
For example, investors who have retired or are approaching that period usually prefer low-risk instruments or even no risk.
Under these conditions, these types of investors prioritize stable profits or income as a way of financing life in retirement and cannot delay returning assets when their value decreases.
Also, usually, investors who have short-term investment goals, for example, saving for a down payment for a house or wedding ceremony costs in under one year, will prefer this risk-averse investment strategy.
The reason is that by choosing this type, the investor’s investment value will continue to increase without worrying about the risk of loss that can hit at any time.
Investment Strategy with the Risk-Averse Method
Several special investment instruments and strategies can help risk-averse investors, namely, as follows.
1. Savings Accounts
One option for storing money safely and also being able to pay interest rates close to 1% is a savings account at a bank.
In some banking companies, the opportunity for promised annual returns can even touch the 2% mark.
In addition, customers can access their money at any time, in addition to a guaranteed interest rate, although the value can change according to bank regulations.
2. Money Market Account
It is a combined saving and checking account that can pay interest at a higher rate than a bank account.
Usually, money market accounts have limits regarding the number of funds that can be disbursed per month.
In addition, this instrument also requires a higher minimum/minimum balance than a bank savings account.
3. Corporate Bonds
Sometimes a bond product is also launched by a company in order to solicit capital to fund a project or business growth.
Even though they don’t have collateral like government bonds, these corporate bonds, in fact, still carry a low risk, namely as long as investors choose companies with AAA ratings from rating agencies.
For information, when holding the rating above, a corporation is considered to have minimal credit risk and has demonstrated its creditworthiness.
4. Stock Dividends
This type of dividend stock can provide a safer profit even though it is known that all stock products have risks.
Types of dividend stocks are companies that pay dividends to shareholders annually.
Giving this dividend can help investors offset the risk of loss and increase the chance of profit.
5. Certificate of Deposit
For risk-averse investors, financial products from this bank are also worth choosing.
Here, investors only need to invest money in a certain amount, then leave it for an agreed period, and then the bank will return the capital along with interest.
Depending on the agreement, the duration of keeping the certificate of deposit can be up to 10 years.
This instrument is considered safe because it guarantees a return on capital. Generally, interest rates are the yield is also higher than a bank savings account.
As a tip, to make it safer and more reliable, choose a bank that is a member of the Deposit Insurance Corporation (LPS).
Examples of Risk Averse Investments
For example, Mr. A is a person who recently entered the investment world.
Because he was unfamiliar with financial products and had a low-risk tolerance, Mr. A hired a financial advisor.
Mr. A did this to study the potential for conservative investment.
Then, the financial adviser gave input. Namely, Mr. A was asked to invest his funds in two instruments, savings accounts, and government bonds.
According to the financial adviser, both products can provide a fixed income or profit, interest, and the potential return on investment capital.
In the end, with this strategy, Mr. A will not get a significant return, but at least he is able to avoid the high potential risk of loss.
Conclusion
In conclusion, a risk-averse is a conservative type of investor who will avoid risk by choosing low-risk investment instruments, such as bank savings accounts, certificates of deposit, etc.
This type of investor differs from a risk-seeking investor who prefers to invest in high-risk investment instruments.
It is important to underline to avoid various types of risk of loss in multiple types of instruments. You should know and study in depth several existing investment instruments.
On the other hand, for those who want to know how to invest in safe and legal bitcoin for beginners, you can see the full article here.
I hope it is useful
