A dozen different factors – perhaps more – go into determining the risk tolerance of an investor.

In simple terms, the greater the asset growth an investor wants, the riskier will be that investor’s investment decisions. Going the other way, the more an investor is concerned about maintaining their current level of assets, the less risky that investor is going to be in his or her investment decisions.

Risk equates to danger, and in investment terms, the danger is in losing some or all of the principle investment. Risk also equates to reward, the reward being the level of growth that comes when the risky investment pays off.

While every investor is unique, there are trends related to an investor’s willingness to take a risk with their investable assets. Those trends are examined in Spectrem’s new study on risk as it relates to an investor’s knowledge level and advisor dependency.

The basic discovery of the study The Influence of Knowledge and Investment Risk on Advisor Dependency is that the more knowledgeable the investor, the more that investor is willing to take a risk with investments and the less likely they are to depend on an advisor.

“Although the causes can be argued (does knowledge create risk-taking, or does risk-taking require knowledge?) there is a connection between those two investor traits,’’ said Spectrem president George H. Walper Jr.

But what else do we know about the investors who are willing to take risks with their investable assets? The study goes a long way toward describing the investors who consider themselves to be “aggressive’’ or “most aggressive’’ in terms of risk tolerance.

According to the study, 25 percent of all investors consider themselves to be aggressive (22 percent) or most aggressive (3 percent) in terms of risk tolerance. However, that includes 32 percent of investors who work in the field of Investment Technology, and 35 percent of unmarried investors.

Fifty percent of the Most Aggressive investors are Baby Boomers, and 45 percent are from the following generations of Generation X and Millennials. Among Aggressive investors, 59 percent are Baby Boomers and 23 percent are from the Millennial-Gen X group. It is noteworthy that 18 percent of the Aggressive investors come from the World War II generation, which usually leans toward being conservative as older investor back away from risky investments.

Segmented by retirement status, there is a 65-26 percent split among Most Aggressive investors in terms of working versus retired, and among Aggressive investors, the split is 57-36. Semi-retired investors make up the remainder to 100 percent.

There is also evidence that investors who make financial decisions jointly are more likely to be conservative in risk-taking. The split among Most Aggressive investors is 53-47 percent single decision-maker versus joint decision-maker, while Conservative investors have a 23-70 percent split between single and joint decision-makers.   

 

Top Takeaways for Advisors

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The demographics of risk-taking among investors are important for advisors to know and understand the possible causation of each demographic. Advisors should not make assumptions based on the demographics but should note when an investor does not fit into the usual demographic description of an aggressive or conservative investor in order to assist in future decision-making.

Advisors should also note that risk-taking in investments is a liquid trait, meaning that a person who is an aggressive investor at the age of 40 is likely to be less aggressive when he or she reaches a certain later stage of life. While investors may be the ones to bring up the subject of a changing investment risk level, advisors might want to also broach the subject when an investor reaches a certain age, wealth level or employment status.

 

©2018 Spectrem Group