If you were standing on a 30-foot cliff over the ocean would you jump? What if I told you there were no rocks you could hit and the water was 25 feet deep? The risky person would probably jump without analyzing the dangers. The neutral risk person would weigh their options given the facts. The risk averse person wouldn’t jump even if you told them their was a pot of gold at the bottom. This same idea applies to your money. What levels of risk are you willing to take?
A risk loving person is looking for a quick and high return on their money. They are willing to lose it all for the chance to double it. They will either bet it all on black at the roulette table or place it all in the stock market thinking they found the next Google. This type of person lives dangerously, which can lead to wealth or bankruptcy in a hurry. They are often the younger generation because they have the time to recover losses before retirement.
A risk neutral person is likely to weigh all options prior to making a decision. This type of person will most likely diversify their portfolio and spread their risk over various investments ranging from certificates of deposits to stocks. They don’t like to have all their eggs in one basket. If this person is given the option to take $50 now or given a 50% chance of winning $100, they will likely take the $50. There are some risk neutral people that will take the 50% chance, but for the most part they will take the guaranteed money.
A risk averse person will minimize risk as much as possible. They will accept a moderate to low return on their money for taking little risk. This person is often older because they don’t have time to recover the losses prior to retirement. They will generally invest in index funds and government bonds to protect that nest egg.
Your level of risk is most important aspect to understand prior to investing. I am 50% risk neutral and 50% risk averse. I hate losing my money, but I may need to shift more towards risk neutral so I can make my money work for me. Like I have stated before, the stock market is an educated gamble. Have fun investing, but make sure to understand your level of risk.
What kind of risk taker are you? I would love to know.
And by the way, I would jump off the cliff if I knew the water was deep enough and that there were no rocks.
Have a great day!!!