4 Types of Financial Risk Takers: Which One Are You?
We may each have our own unique personality, but not when it comes to investing. Investors can be divided into one of four groups based on their approach to risk, according to a new survey of 3,000 American adults conducted by Ameriprise Financial.
Taking financial risks makes most people nervous, the survey found. Nearly 75% of respondents said they avoided risk entirely or were very cautious about taking chances with their money. Roughly a quarter said they were comfortable with risk and a small number embraced risky investments. The survey respondents all had at least $25,000 in investable assets.
“Given the recent market volatility, it’s not hard to see why some people are cautious when it comes to perceived risks,” Marcy Keckler, vice president of Financial Advice Strategy at Ameriprise, said. “Still, it’s important to note that any investment involves some level of risk. The key is to arm yourself with knowledge to help you make informed decisions.”
Nervousness over recent market behavior and still-fresh memories of the 2008 financial crash is one reason some people are hesitant to invest in the market. But other factors may also be at play. Studies have shown that men, especially single men, tend to be more comfortable with financial risk than women. Other research has suggested that younger people may be more averse to risk than older people, perhaps because they aren’t as well equipped to cope with a big financial loss.
Ultimately, the specific factors that influence your risk tolerance may be less important than your ability to know yourself as an investor. Once you understand how you approach risk, you’ll be better able to avoid pitfalls and make smart money decisions.
Here are the four main risk personalities that Ameriprise identified in its survey. Which one are you?
1. Risk Avoider
Share of investors with this personality: 31%
Roughly 90% of risk avoiders say they take a cautious approach to their finances. Many look for guaranteed returns, even if that means settling for investments that earn less money. They also say they’d pull back on investing if things got too volatile. Rather than seeing risk as opportunity to earn bigger returns, they view it as something to steer clear of if at all possible.
Ironically, risk avoiders are so nervous about losing money that they may actually end up exposing themselves to more risk. People in this group may keep their savings in cash, which means they’re actually losing money to inflation. They’re also likely to be behind on their retirement savings and be underinsured. Baby boomers and women are more likely than other groups to be risk avoiders.
If you’re a risk avoider: The survey found that risk avoiders are less likely to do research before they invest, so fear of the unknown may be behind your aversion to risk. Taking time to educate yourself about different investments — and finances in general — should reduce your anxiety about investing.
2. Risk Mitigator
Share of investors with this personality: 42%
Risk mitigators represent the largest category of investors, and they’re equally split between millennials, Gen Xers, and baby boomers. Unlike risk avoiders, risk mitigators are willing to take a chance on an investment once they’ve done significant research. They also understand the importance of diversifying their portfolio. Yet people in this group still prefer low-risk investments and get nervous when markets are volatile.
If you’re a risk mitigator: Don’t get spooked when markets fluctuate. “Focusing only on investments with a guaranteed return or shifting to conservative investments during a volatile market can be triggered by doubt,” Keckler said. Sticking to your investment plan and finding a financial advisor whom you trust can help you navigate those ups and downs.
3. Risk Manager
Share of investors with this personality: 25%
People in this group see risk as an opportunity and have an informed, well-thought-out approach to investing. Most say that they have a good understanding of their 401(k) and 45% invest heavily in the stock market.
“Risk managers tend to take the driver’s seat when it comes to their finances, which makes it easy to understand their level of confidence,” Keckler said. “In fact, an overwhelming majority are highly confident they are saving enough for retirement.”
If you’re a risk manager: Risk managers are doing almost everything right when it comes to investing. Just don’t let your confidence get the best of you. Assuming you know more than you actually do could lead you to gamble a bit more with your finances than you should. Overconfident male investors trade more frequently than their female counterparts, leading to lower investment returns, one study found
4. Risk Embracer
Share of investors with this personality: 3%
Risk embracers are more likely to be young and male – 56% are millennials and 67% are men. People in this category get a thrill from investing and are more likely than other investors to take a chance on high-risk, high-return investments. Like risk avoiders, they don’t do a lot of research before they invest and their investments tend not to be well diversified. People with this personality type are also more likely to buy a home they can’t really afford or make big career changes without thinking about the financial consequences
If you’re a risk embracer: If you thrive on danger, you may want to take up skydiving rather than gambling with your savings. Taking some risk with your investments is a good thing, but you want to make those moves from a position of financial security. In other words, don’t bet your next mortgage payment on the next hot stock.