# Understanding Risk Aversion: Safe Investments & Strategies Explained

> **Definition**
>
> An investor is considered risk averse if they prefer choices with less uncertainty, even if the potential reward is smaller. They prioritize avoiding losses over possibly maximizing gains.

## What Is Risk Averse?

Risk averse refers to investors who avoid more risk than necessary in their investments. They prefer conservative, less aggressive investments that are less likely to lose value. So they focus on preservation of capital and some growth in value, even if it means they receive a lower return. Risk-averse investors prefer liquidity and favor municipal and corporate bonds, CDs, and savings accounts. Risk aversion is the opposite of [risk seeking](https://www.investopedia.com/terms/r/risk-seeking.asp). Generally, the return on a low-risk investment will match, or slightly exceed, the level of inflation over time. A high-risk investment may gain or lose a bundle of money.  

### Key Takeaways

*   Risk-averse investors prioritize capital safety and accept lower returns for reduced risk.
*   Common risk-averse investments include CDs, savings accounts, and highly rated bonds.
*   Diversification helps minimize risk by spreading investments across various assets.
*   Risk aversion can lead to missed opportunities for higher returns on riskier assets.
*   Inflation can erode the value of money kept in low-risk, low-return investments.

![Risk Averse: The investor who prioritizes the preservation of capital over the potential for a high return.](https://www.investopedia.com/thmb/cIvO9ab9fOtYZFOPdjMlDTPF2Jk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Riskaverse_final_rev_02-aeaf9c912e1d4b9dab3481f76f514839.png)

*— Michela Buttignol / Investopedia*

## Diving Deeper into Risk Aversion

The term “[risk neutral](https://www.investopedia.com/terms/r/riskneutral.asp)” describes the attitude of an individual who evaluates investment alternatives by focusing solely on potential gains regardless of the risk. That may seem counterintuitive—to evaluate reward without considering risk seems inherently risky.

Nonetheless, offered two investment opportunities, the risk-neutral investor looks only at the potential gains of each investment and ignores the potential downside risk. The risk-averse investor will pass up the opportunity for a large gain in favor of safety.

### Best Investment Options for Risk-Averse Investors

Risk-averse investors typically invest their money in savings accounts, certificates of deposit (CDs), municipal and corporate bonds, and dividend growth stocks. All of the above, except for municipal and corporate bonds and dividend growth stocks, virtually guarantee that the amount invested will still be there whenever the investor chooses to cash it in.

Dividend growth stocks, like any stock shares, move up or down in value. However, they are known for two major attributes: These stocks belong to mature companies with steady income and regularly pay dividends to investors. This dividend can be paid to the investor as an income supplement or reinvested in the company’s stock to add to the account’s growth over time.

### Characteristics of Risk-Averse Investors

Risk-averse investors are also known as conservative investors. They are, by nature or circumstances, unwilling to accept volatility in their investment portfolios. They want their investments to be highly liquid. That is, their money must be there in full when they’re ready to make a withdrawal. There is no waiting for the markets to swing up again.

Most risk-averse investors are older individuals and retirees. They may have spent decades building a nest egg. Now that they are using it, or planning on using it soon, they are unwilling to risk losses.

## Popular Products for Risk-Averse Investing

### Savings Accounts

A [high-yield savings account](https://www.investopedia.com/how-to-open-a-high-yield-savings-account-4770631) from a bank or credit union offers a stable return with minimal risk. The [Federal Deposit Insurance Corp. (FDIC)](https://www.investopedia.com/ask/answers/08/fdic-insured-bank-account.asp) and the [National Credit Union Administration (NCUA)](https://www.investopedia.com/terms/n/ncua.asp) insure funds held in these savings accounts up to generous limits.

The term “high-yield” is relative, however. The return on the money should meet or slightly exceed the level of inflation.

### Certificates of Deposit (CDs)

Risk-averse investors who can leave their money untouched might use a [certificate of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp). CDs typically pay slightly more than savings accounts, but they require the investor to deposit the money for a longer period of time. Early withdrawals are possible but come with penalties that may erase any income from the investment or even bite into the principal.

A key risk faced by investors in a CD is [reinvestment risk](https://www.investopedia.com/terms/r/reinvestmentrisk.asp). This is when interest rates fall and when the CD matures, the investor’s only option for a CD is at lower rates than before. There can also be bank failure risk if the value of the CD is greater than $250,000.

CDs are particularly useful for risk-averse investors who want to diversify the cash portion of their portfolios. That is, they might deposit some of their cash in a savings account for immediate access, and the rest in a longer-term account that earns a better return.

### Money Market Funds

A [money market fund](https://www.investopedia.com/terms/m/money-marketfund.asp) is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents. These funds are low risk and structured to keep each share worth $1. Because they are conservative, they tend to pay relatively low rates of interest to investors.

### Bonds

[Treasury securities](https://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp), or the debt issued by the U.S. federal government, are considered to be the safest of all securities. Investors can access Treasuries via mutual funds or exchange-traded funds (ETFs), or directly through the government’s [TreasuryDirect](https://www.investopedia.com/terms/t/treasurydirect.asp) [website](https://www.treasurydirect.gov/).

State and local governments, as well as corporations, also routinely raise money by issuing bonds. These debt instruments pay a steady interest income stream to their investors. Bonds also tend to offer lower risk than stocks. Note that bonds do come with risks—Russia, for example, defaulted on some of its debts during a financial crisis in 1998. The global financial crisis of 2008–2009 was partially caused by the collapse of bonds that were backed by mortgages made to subprime borrowers.

Notably, the agencies tasked with rating those bonds should have assigned them ratings that reflected the risks of the investments. They were “junk bonds” marketed as safe bonds. Risk-averse investors buy bonds issued by stable governments and healthy corporations. Their bonds get the highest [AAA rating](https://www.investopedia.com/terms/a/aaa.asp).

In the worst-case bankruptcy scenario, bondholders have first dibs on repayment from the proceeds of liquidation. Municipal bonds are often tax-exempt, which can increase the investor's total return compared to corporate bonds.

### Dividend Growth Stocks

[Dividend growth stocks](https://www.investopedia.com/earn-monthly-passive-income-from-dividend-stocks-8782146) can appeal to risk-averse investors because their predictable dividend payments help offset losses even during a downturn in the stock’s price. In any case, companies that increase their annual dividends each year typically don’t show the same volatility as stocks purchased for capital appreciation.

Many of these are stocks in so-called defensive sectors. These companies earn steadily and are less affected by economic downturns. Examples are companies in the utilities business and companies that sell consumer staples.

Investors generally have the option of reinvesting the dividends to buy more shares of the stock or taking immediate payment of the dividend.

### Permanent Life Insurance

[Permanent life insurance](https://www.investopedia.com/terms/p/permanentlife.asp) products like whole life and universal life come with [cash accumulation features](https://www.investopedia.com/terms/c/cash-value-life-insurance.asp), tax advantages, and living benefits that make them attractive for risk-averse investors. Cash value in a life insurance policy can’t ever lose value and grows over time. Policy owners can withdraw or borrow against that cash value anytime (but this may reduce the policy’s death benefit amount).

## Effective Strategies for Risk-Averse Investing

In addition to individual assets or asset classes that cater to risk-averse investors, there are also a number of risk-averse investment strategies that can be employed to minimize losses.

Diversifying your portfolio is one strategy. [Diversification](https://www.investopedia.com/terms/d/diversification.asp) means including assets and asset classes that are not highly correlated with one another. This way, you are not putting all of your eggs into one basket, and if some securities fall on a given day, others may rise to offset those individual losses. Mathematically, diversification allows you to maximize your expected return while minimizing your overall portfolio risk.

Income investing is another strategy that focuses on holding bonds and other fixed-income securities that generate regular cash flows, as opposed to seeking capital gains. [Investment income](https://www.investopedia.com/terms/i/investmentincome.asp) is especially useful for retirees who no longer have employment income and can’t afford to experience losses in the markets. Income investing does come with certain other risks, including inflation or negative credit events. [Bond and CD laddering](https://www.investopedia.com/terms/b/bondladdering.asp), along with inflation-protected securities, can help lower your overall fixed-income portfolio risk.

> **Fast Fact**
>
> Saving is very low risk, but it is not investing. Investing means that your money is inherently at risk, whether you are buying a stock or lending money in the form of a bond.

## Pros and Cons of Risk Aversion in Investing

Exhibiting risk aversion means shying away from risk, and in terms of investing means avoiding risky securities. Risk-averse individuals should seek out investments and strategies that fit this low-risk tolerance. As such, one advantage is that the risk of losses is minimized. Low-risk investments like bonds can offer steady cash flows and consistent returns.

However, with low risk comes low expected return. In fact, the risk-return trade-off doesn’t favor a risk-averse investor who shies away from stocks and other risky assets. Such risk-averse investors will tend to enjoy lower total returns, especially over long [time horizons](https://www.investopedia.com/terms/t/timehorizon.asp). Risk aversion can also lead people to irrationally avoid otherwise good opportunities and stay away from the markets entirely, putting them at a disadvantage when saving for things like retirement. Moreover, money kept idle in savings or “under the mattress” will lose buying power over time as it is eroded by inflation.

Pros

*   Minimizes risk of losses
    
*   Can generate steady income
    
*   Guaranteed cash flows
    

Cons

*   Much lower expected returns, especially over time
    
*   Missed opportunities (opportunity cost)
    
*   Inflation erodes buying power of savings
    

## Which Types of People Are More Risk Averse?

Research shows that risk aversion varies among people. In general, the older you get, the lower your [risk tolerance](https://www.investopedia.com/terms/r/risktolerance.asp) is, especially as investment time horizons for things like retirement draw near. On average, lower-income individuals and women also tend to be more risk averse than men, all else being equal.

## Is It Good to Be Risk Averse?

Being risk averse is a double-edged sword. On one hand, you greatly lower your chances of losses, but on the other hand, you also can miss good opportunities and greater returns on riskier investments.

## How Can I Tell If I Am a Risk-Averse Investor?

You can gauge your risk tolerance for investing by taking any number of [risk profiling questionnaires](https://www.investopedia.com/terms/r/risk-profile.asp) available online. When you sign up for a brokerage account or financial advising relationship, you may also be required to take such an evaluation.

## Is Risk Aversion the Same As Loss Aversion?

No. Risk aversion is one’s general attitude toward avoiding risk. [Loss aversion](https://www.investopedia.com/terms/l/loss-psychology.asp) is instead the asymmetric propensity to feel the pain of a loss more than the pleasure from an equivalent gain (e.g., losing $100 usually feels worse than gaining $100 feels good). Being risk averse can be completely rational given one’s personal situation. Loss aversion, however, is an irrational tendency identified by [behavioral economics](https://www.investopedia.com/terms/b/behavioraleconomics.asp).

## The Bottom Line

Risk aversion prioritizes capital safety, often at the cost of lower returns and is typified by older investors and retirees who want to protect the money that generates their income. Typical investment options for risk-averse investors are savings accounts, CDs, highly rated bonds, and dividend growth stocks. Risk-averse investment strategies include diversification and income investing for stability. It's important to understand that [opportunity cost](https://www.investopedia.com/terms/o/opportunitycost.asp) is a trade-off for less risky investing.

> **Article Sources**
>
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>     
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>     
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>     
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