Income Level Often Determines Risk Tolerance
By definition, taking a risk means abandoning a safe position, but “taking risk” can also lead to great reward.
Fifty-two percent of investors surveyed by Spectrem Group selected “taking risk’ as one of the factors contributing to their wealth. Hard work, education, frugality and smart investing were chosen more often than “taking risk” by the investors interviewed.
The study was a unique look at investors based on income levels rather than net worth levels, and the results showed differences between the groups based on income.
The study showed that tolerance for risk increases as income increases, but there are a lot of investors who do not like to take risks at all.
Sixty-four percent of investors with a net income of $750,000 or more said “taking risk’’ contributed to their wealth. That income group had the lowest percentage of investors (45 percent) who said “frugality’’ contributed to their wealth.
Only 45 percent of investors with a net worth of under $100,000 said “taking risk’’ contributed to their overall wealth position.
Although there was no definition of the term, 88 percent of investors with the highest level of income said “smart investing” contributed to their wealth. There was no information on whether “smart investing’’ included “taking risk.”
Only 9 percent of investors said they would have taken less risk in investments if they had a chance to do over their financial decisions prior to the economic collapse a few years ago.
Fifty percent of investors with a net income of greater than $750,000 annually characterize themselves as either ‘most aggressive’ (10 percent) or “aggressive” (40 percent). No other income level of investors reported anything above 33 percent in those two risk tolerance categories.
But investors with a net income of between $500,000 and $750,000 reported the highest level of “conservative’’ investors at 26 percent.
Mass Affluent investors, with a income of under $100,000, had 81 percent of investors either considered “conservative’’ or “moderate” in their investment plans.
But 36 percent of all investors said they would be willing to take a significant investment risk in order to earn a high return on the investment.