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Risk aversion: Why you need to change your strategy

Investors who adhere too much to risk aversion could miss out on a lot of opportunities.



Whenever you consider a potential investment, there’s always a considerable focus placed on achieving the desirable risk-reward ratio.

More specifically, people tend to tailor their investment choices and portfolio to suit their unique philosophy, whether they’re risk-averse or have an appetite for volatile markets that have the potential to deliver an exceptional return.

While this should inform the choices that you make, however, it’s important to remember that risk aversion should be considered as an investment strategy. The same can be said for those who prefer higher-risk investments, as the way in which you manage risk and strive to optimize your returns is far more important.

The importance of risk-reward and determinism

Successful traders have a tendency to be deterministic in their outlook, as they focus on the underlying laws that govern change in the marketplace and the individual elements of their investments that can be controlled.

This is where the preoccupation with risk comes from, as investors must prioritize markets that suit their outlook and are capable of delivering a viable and realistic return. By making considered investment choices, it’s possible to achieve a desirable balance between risk and reward and achieve greater control over capital deployment.

By themselves, however, the careful selection of markets and assets in relation to risk and reward cannot be considered as standalone strategies. Instead, they represent the foundation of a viable strategy and one that affords you the best possible chance of success.

risk aversion

A stringent risk management system can prove to be a more viable investment strategy than risk aversion. (Source)

Why risk management holds the key to successful investments

Once you’ve selected your assets and build a diverse and appealing portfolio, however, it’s how you manage this and the associated risk that will determine the success or failure of your efforts.

After all, all investment vehicles carry risk, and adhering too strictly to a risk-averse outlook could cause you to miss out on opportunities. Similarly, being wedded to the notion of risk can create an unbalanced portfolio and one that fails to deliver a viable risk-reward ratio.

Instead, you need to implement stringent risk management measures and apply these to your investments, such as securing the services of an advisory firm. Independent consultancies such as Hymans offer a relevant case in point, as they can help to structure your investments while offering actionable advice on how to proactively protect them.

If you like to invest through an online trading platform, it’s also worth using the automated risk-management features that are inherent to these resources. Take stop losses, for example, which can be applied to volatile and margin-based assets to automatically close positions once a predetermined loss threshold has been reached.

With this type of attention to detail, you can build on your unique risk outlook and create a practical investment strategy that delivers genuine rewards.

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Doron Levy is a Toronto-based business consultant and journalist. During his 15 year tenure working deep in the operations and marketing sides of the retail industry, Doron was impressed at the resilience and dynamics of the luxury category and began covering the industry through trade articles in 2010., That same year, he launched as a web magazine dedicated to covering all aspects of the business of luxury. The portfolio of informational websites has grown under the umbrella brand, TheTopTier Digital Media. Doron is still in the consulting business delivering training, marketing and operational solutions to up and coming elite and luxury brands.