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4 Ways Clients Approach Risk: Many Hate It, a Few Love It

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Many American investors dodge risk at all costs, while others enthusiastically embrace risky decisions, according to research reported Wednesday by Ameriprise Financial.

Ameriprise said that in a poll of 3,000 people between ages 25 and 70, 73% either avoided risk entirely or carefully weighed risk when making financial decisions.

Survey respondents ranged from millennials with at least $25,000 in investable assets to Gen Xers and baby boomers with at least $100,000 in investable assets.

Against the backdrop of recent market volatility, respondents acknowledged that they could better understand and embrace additional financial risk for the benefit of their portfolios by being more proactive in their financial education and investing strategies.

“Investing for the long term, while also trying to navigate market swings, is one of the biggest challenges facing investors,” Marcy Keckler, Ameriprise’s vice president of financial advice strategy, said in a statement.

“Whether you are an experienced investor or beginning to build your retirement nest egg, having a comprehensive financial plan and understanding how risk factors into your plan can help build financial confidence.”

In recent years, a number of firms have come on the scene to help investors and their advisors assess risk tolerance.

Sydney-based FinaMetrica’s Risk Tolerance System uses a 25-question survey to determine an individual’s personal financial risk tolerance.

California-based Riskalyze offers questionnaires that advisors can use to generate a “risk number” that aligns portfolios with risk preferences. Riskalyze announced Tuesday that it had consolidated its three products into a new platform

Based on the findings of its survey, Ameriprise described four profiles along a financial risk continuum, from those who avoided risk to those who embraced it:

Risk Avoider

Risk Avoider (31% of investors surveyed)

Risk avoiders were the most guarded respondents in terms of financial risk-taking, with 89% saying their outlook on risk was “cautious.”

Forty-two percent of respondents in this profile claimed they were unwilling to take risks with their finances, associating risk with loss or uncertainty. Yet many were increasing their exposure to risk unknowingly:

  • Many people in this group reported being underinsured
  • Many only made investments with guaranteed returns
  • Some were storing their savings in cash
  • These investors were less likely to conduct the research necessary to help mitigate risk

In their personal lives, risk avoiders were averse to such risks as changing their career or moving far away.

Sixty-one percent of risk avoiders were baby boomers and female.

Risk Mitigator

Risk Mitigator (42% of investors surveyed)

Risk mitigators, although careful about risk, were less so than risk avoiders.

Eighty-nine percent of these investors characterized themselves as willing to take risks after significant research, but like their more cautious counterparts also associated risk with loss or uncertainty in their investment outlook.

Risk mitigators were more engaged in actions to protect their assets, such as diversifying investments and being sufficiently covered by health and life insurance. However, they remained uncertain about their approach to investing and risk.

This group preferred low-risk investments, and shifted to conservative choices during periods of market volatility — not always to their benefit.

Risk Mitigators fairly evenly comprised millennials, Gen Xers, baby boomers, and women and men.

Risk Manager

Risk Manager (25% of investors surveyed)

Risk managers were confident about risk and financial decisions. All viewed financial risk as an opportunity.

Consumers who fit this profile were willing to take informed risks after conducting research and to focus on growing their retirement savings through investing.

They deployed well-thought-out risk mitigation strategies, such as assessing financial decisions along with diversifying and balancing investments.

Forty-five percent of risk managers reported heavy investments in the stock market, and the majority purported to understand the details of their 401(k) plans.

Sixty-one percent of risk managers were male, and they were represented equally across the three generations surveyed.

Risk Embracer

Risk Embracer (3% of investors surveyed)

Sixty-four percent of risk embracers described themselves as “real risk seekers,” with 76% saying they were willing to make high-risk and high-return investments.

The survey found these investors strongly drawn to risk. Thirty-nine percent associated financial risk with “excitement.”

Risk embracers also admitted that they were more willing than their peers to take risks in other areas of life, such as borrowing too much when buying a house or making a career change with less financial security.

Fifty-three percent of this group considered themselves knowledgeable about investing, although they were primarily focused on growing their investments rather than employing mitigation strategies to protect assets.

Fifty-six percent of risk embracers were millennials, and 67% were male.

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