Risk Aversion is a behavioural concept which helps to explain how humans think.
People prefer predictable investments — even where the average expected result is greater than the safer, low-risk returns.
How Does This Translate Into Finance?
It typically feeds directly into your risk profile — which aids your investment decision making. Your risk profile is generally classified into one of three categories:
Where Does Your Risk Profile Come From?
There are plenty of reasons why people have different risk profiles, and in my experience they're shaped by upbringing and life experiences.
If you grew up in a household where money was a source of stress — or simply never discussed because it felt too sensitive — you might lean towards a more risk-averse profile. On the other hand, if you watched your parents make bold investment decisions and they took the time to explain how they calculated those risks, you'd probably develop a similar appetite for risk yourself.
Even siblings raised in the same environment can respond to it completely differently — which explains why two people from the same family can have very different money mindsets.
Your risk profile is part of who you are. It's worth knowing where you sit on the spectrum so you can choose investments that genuinely suit you.
Where Do Common Investments Sit?
To give you a general idea of how different investment types map to the risk spectrum:
The level of risk in these options will differ for everyone. We all weigh things like guaranteed returns, potential growth, and volatility a little differently — but these examples are a good starting point to get you thinking.
If you've got a low tolerance for risk but already have a solid financial plan, an emergency fund, and some long-term safe investments in place — why not push yourself to something which feels challenging? Who knows, you might learn a thing or two. 😄