Different individuals have different levels of tolerance for risk in business investments. How much risk is acceptable to you may differ from what is acceptable to your colleague, business partner, or neighbor. In terms of risk tolerance there are two extremes we generally deal in, those who are risk averse, and those who take risks. Depending on the circumstances in the overall economy one may make out significantly better than the other in their investments. The reality is one state is not better than the other.
In fact the ideal investor is able to see both sides of the risk profiles looking at each investment from a risk adverse and risk-taking standpoint. A certain level of risk is required in order to ensure any kind of returns on a business investment. There is no such a thing as a zero risk investment. With that said, a certain amount of risk should be taken to secure returns, but it should not be so much that the investor can not sleep at night.
Greater risk does overall equal a greater reward if the business cycle is going well. But we understand this sort of riskier approach to investing in business opportunities is not for everyone. So what level risk should you take? There are financial institutions and banks like Lloyds which can advise your business about risk management and how to assess what’s a good business risk and what’s a poor one. All investment strategies depend on evaluating risk. Here are four investment strategies based on risk profile.
Investing for the Highly Risk Averse
The highly risk averse investor will not make any kind of business investment in a business let alone the stock market. They view these investments as gambles. Individuals who fall into this category will have difficulty earning any return, in fact returns are usually negative in all three of their strategies.
- They hide their money in their mattress.
- Place money in a savings account at a low interest rate.
- Buy US treasuries at under a percent in interest.
Investing for the Risk Averse
Some degree or risk aversion is healthy. A risk averse investor does more research than a risk taker and plans their investments accordingly. Returns will be low, but generally positive and stable. They tend to:
- Invest in a combination of treasuries, and managed funds.
- Combination of managed funds, some stocks, and cash.
Investing for the Risk Taker
A risk taker tends to keep a larger portion of their portfolio in the stock market. Generally very little of their portfolio is held in cash or low risk investments. These investors:
- Invest in the stock market, and hold a few bonds.
- Invest in starting a business while holding some bonds and stocks in case the business goes south.
Risky Investing
Risky investing is betting the farm. It generally categorises the following types of strategy:
- Day Traders
- Start own business.
- Invest large sums in single companies, typically pre revenue venture companies.
