Some people love jumping out of planes with parachutes while others would rather have a nice cup of tea indoors. Those attitudes toward risk show up in financial behavior, as well.
From daredevils to financial sticks-in-the-mud, there is a wide spectrum of attitudes toward risk. There are at least 4 main risk profiles recently identified in a survey from Ameriprise Financial.
Being aware of your attitude toward risk and how it shapes your investing behavior can help you steer away from emotional decisions and avoid potential blind spots.
Attitudes toward investing risk
The 4 attitudes toward risk found by Ameriprise Financial are risk avoiders, risk mitigators, risk managers and risk embracers.
- Risk avoiders
Risk avoiders are very cautious and try to avoid any type of risk whatsoever. But this group may be missing out on stock market growth and other opportunities to earn investment returns above the inflation rate. 14% of people who fell into this category in the Ameriprise survey reported that they believe they are mitigating risk by staying out of volatile markets.
- Risk mitigators
Unlike the avoiders, mitigators are more open to investment opportunities. But they would still prefer to play it safe. Nearly half, 46% of people who were risk mitigators in the survey, say they prefer to jump out of the stock market when it gets volatile to avoid losses.Ironically, that can lead to further losses if their market timing isn’t perfect. Because no one can read the future, timing the market is often a losing battle.
- Risk managers
Risk managers are knowledgeable about their investments and like to know where their 401(k) balances stand. They tend to be optimistic, with 51% investing in the stock market on their own without the help of a financial professional.
- Risk embracers
Risk embracers love to take risks and the behavior extends beyond their finances. Over half of the risk embracers in the survey say they take all kinds of risks all the time, such as driving without a seat belt.
What should I do now?
Being aware of your own tendencies and being knowledgeable about some of the pitfalls of taking too little or too much risk can help investors feel more confident about their saving and investing.
“If you are protecting yourself from market risk but limiting growth, inflation will diminish buying power over time,” says Marcy Keckler, CFP professional and vice president of financial advice strategy at Ameriprise.
People who fell into the risk-avoider category of the survey were most likely to say that they feel insecure about their level of retirement savings, according to Keckler. But there are some steps people can take to feel more confident about their saving and investing choices.
“One of the things we saw that helped people that had moved up in comfort level was having the right insurance in place,” Keckler says.
Being knowledgeable also makes a big difference. “Understanding their options and doing research make people feel more comfortable,” she says.
Working with an adviser was also likely to increase comfort levels, the survey found. This makes sense: An objective and knowledgeable expert on your side can be soothing when the market goes haywire.
There’s nothing wrong with any of the attitudes toward risk, Keckler says. It’s just a matter of understanding all the risks you’re taking, not just market risk.
What is your attitude toward risk?
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Senior investing reporter Sheyna Steiner is a co-author of “Future Millionaires’ Guidebook,” an e-book written by Bankrate editors and reporters. It’s available at all the major e-book retailers.