Risk tolerance or risk appetite is an important consideration in financial planning. It can be used as a measure of how much of a loss an investor is willing to endure within their portfolio.
Investors who are risk-tolerant are able to accept higher volatility investments, compared to their risk-averse counterparts.
When advising individual clients, Financial Planners may use research findings to risk tolerance (with regard to investments) as a general guideline. If you are an investor, the research findings below may also be an interesting and useful reference for you:
- Women are generally more risk-aversive than men in financial matters, as well as other areas of life
- The first-born child in a family is typically more risk-aversive than the younger siblings.
- Married individuals are less likely to take risks than single individuals.
- Risk-tolerance tend to decrease as one gets older.
- People who work(ed) in the public sector (eg. government agencies) tend to be more risk-averse, than those of the same generation who worked(ed) in the private sector. However, this generalization is more applicable to older people.
- People who work in a fixed salary job, tend to be more risk-averse than those who work in a commission-based job.
- Individuals with a successful career are usually more risk-tolerant.
- Risk-tolerance tends to grow with increasing income and/or wealth. In fact, most millionaires are risk-takers. Does this imply they have become millionaires by taking risk; or they can take more risk because they are millionaires?
- Business executives are usually more risk-tolerant with business investments, but less so when investing using their own personal funds.
- Some psychologists have identified a personality type known as the “thrill seeker”. These individuals seem to engage in certain activities for the thrill of the risk itself, which may include making risky investments. This type of person is likely to make impulsive and irrational decisions, without considering the consequences.
- Another personality type is the “defensive anxious”. This type of person may be either a consistent risk-taker, or consistently a risk-avoider. To a “defensive anxious” individual, the satisfaction or dissatisfaction with a particular decision may not depend so much on the financial outcome of the transaction, as on whether he feels the choice was consistent with an overall risk strategy.
No matter whether you are risk tolerant or risk-averse, all investors want to achieve a return on the investment they make. If you want to build a investment portfolio which is suitable for your own risk tolerance, contact your FLA Organization Financial Planner for more information today!
