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Investing if you are risk averse

Many people shy away from investing in financial markets because they don't want to put their hard-earned money at risk. The fear of losing money is reasonable — and it's important to acknowledge that it's a very real possibility.

This doesn't necessarily mean that you should sit out the market completely. Instead, you might need to build an appropriate risk-averse investment strategy so you could grow your money over time without triggering undo panic.


It's not about avoiding risk — It's about managing it

Risk and reward are correlated. The more risk you take, the greater the potential for higher returns. On the other hand, following a risk-averse investment strategy means setting expectations for lower returns. Risk is the price you pay for the chance to see more rewards.

All investments carry the risk of loss. There is no such thing as a guaranteed or completely safe investment. If your tolerance for risk is low, that doesn't necessarily mean investing isn't for you. In fact, not investing at all carries its own set of risks. Chief among them? Inflation.

If you let your money sit in cash, it can (and likely will) lose purchasing power over time. That's why investing at least some of your savings is critical. The truth is, risk is everywhere. You can't avoid it — but you can learn to properly manage it.


Start by assessing your risk tolerance

Before you can create an appropriate investment (and risk-management) strategy for yourself, you need an objective measure of your risk tolerance. Risk tolerance refers to how comfortable you are with risk.

Only looking at the market's average annual return can be misleading when it comes to the real-time experience of investing. Annual returns can vary greatly from year to year. For example, the average annual return of the S&P 500 over the last decade, from 2012 to 2022, was 14.5%.1 But in 2018, a year within that period, the index returned negative 6.24%. And in 2008, it declined a whopping 39.49%.2

Your risk tolerance can also give some insight into how you might react during those down years. If you're risk-averse, you might not be able to handle seeing such a dramatic decline in your portfolio. You might do something against your best interest — like sell out of your positions at the bottom rather than waiting it out and riding the rally back to the top.

It's difficult to objectively determine your own risk tolerance. While there are various online tools you can use to get a sense of your tolerance, working with a financial advisor can also help. A skilled advisor can independently assess your risk tolerance — and provide a recommendation for an investment portfolio allocation based on the results.

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Fearing the loss of your money is reasonable, but investing can be a critical if you want to build wealth. Here's how the risk-averse can get started.

Investment strategies for the Risk Averse

If you are a risk-averse investor, here are a few things you should not do.

  • Build an aggressive investment portfolio allocation. Having less exposure to equities and more to investment-grade bonds may be a good choice for you.
  • Maintain very concentrated positions. Diversifying your portfolio may help spread risk so that your future wealth is not tied to the fate of a single (or even a few) specific stocks or assets.
  • Try to time the market or predict when the value of securities like stocks and bonds will rise and fall. Even 90% of professional money managers fail to successfully time the market!3

In addition to avoiding these very large risks, there are ways you can minimize the chance of loss or failure to meet your investment goals, even if you can't eliminate the possibility entirety.

How to manage longevity risk

Longevity risk is the risk of outliving your assets, which is why you should invest early and often. One downside of following a risk-averse investment strategy is that you have to expect lower returns. The market isn't going to do the heavy lifting for you. Knowing that, consider saving more aggressively to account for investing conservatively.

General market risks

General market risk refers to the possibility of losses due to overall market performance. That's why all investments, even "safe" ones, carry some degree of risk even if small. To smooth out general market risks, you can follow a dollar cost averaging approach. With dollar cost averaging, you make predetermined contributions to your portfolio on a periodic, predetermined cadence — so you're not tempted by market timing, and you consistently buy into the market regardless of short-term performance or events.


Investment options for the Risk Averse

Once you're feeling ready to jump into the market with a risk-averse investment strategy, the next question is this: Where do you put your money? You want to invest in vehicles that provide the opportunity to earn returns without putting too much on the line.

While there are no guaranteed or perfectly safe investments, there are some low-risk options you can consider, including:

  • Mutual funds or Exchange Traded Funds (ETFs) that track broad market indices to gain equity exposure in a low-cost, diversified way
  • Individual investment-grade bonds or bond funds
  • Treasury inflation-protected securities (TIPS)
  • Money market funds

Don't go it alone

The best advice for how to invest if you're risk averse? Consider having a trusted professional at your side to guide you, so you don't need to muddle through the options on your own.

A good financial advisor will be able to build a portfolio that is designed to align with both the risks you're willing to take and your personal goals for building wealth. Then they can help you determine what investment risks are worthwhile and which are not appropriate for you.

Talk to a Synovus financial advisor today to help you get started.

 

Diversification does not ensure against loss.

Important disclosure information

  1. "What Is The Average Return Of The Stock Market?," Kent Thune, Seeking Alpha, Accessed June 2, 2022. Back
  2. S&P 500 Historical Annual Returns, MacroTrends.net, Accessed June 2, 2022. Back
  3. "Most investment pros can't beat the stock market, so why do everyday investors think they can win?" Eric Rosenberg, Business Insider, Accessed June 7, 2022. Back