Credit Control: Tips For Managing Your Money

Credit Control: Tips For Managing Your Money

New To Investing? Balance Risk Aversion And Loss Aversion

Levi Bradley

When you invest money in anything, you accept a certain amount of risk. How much is a tolerable risk level for you, though? The answer to this question lies in your risk aversion and your loss aversion. What do these mean for you as an investor? Here's what you need to know to find the right balance. 

What Is Risk Aversion?

In investing terms, risk is the chance that your investment will lose value rather than gain it. How averse to losing some of your money or value determines how much risk you're willing to take to gain a bigger reward. 

What, for instance, would you do if an investment dropped by 10%, 20%, or 50%? Would you sell what's left and try to salvage the remaining value? Would you do nothing and wait to see if it rises again? Or would you buy even more of that investment, reasoning that it's a better deal now? The answers help you figure out how risk averse you are — or are not. 

What Is Loss Aversion?

While the idea of loss aversion sounds the same as risk aversion, it actually means you feel stronger about loss than about gain. You would rather give up a higher reward if it means minimizing loss. You would, effectively, be more distraught to lose a little value than you would miss out on high gains. 

How Can You Find a Balance?

Even if you are loss averse, there are ways to invest successfully. The first step is to learn more about your own investing style and tolerances. What makes you loss averse? Do you feel like you don't understand investing enough? Are you investing for a short time frame rather than a long one? Have your past experiences with money affected how you view losses? Analysis can help you overcome loss aversion. 

In addition, keep in mind that you don't have to do the same things with all your investments. Perhaps you have an inheritance from a beloved family member and are averse to losing any of it. In this case, invest this sum in safer forms of investment like bonds or CDs. Then, you can take on more risk with money to which you don't have sentimental attachments. 

Finally, dip your toes in. Many new investors are loss averse due to unfamiliarity with the cycles of gains and losses common to many markets. When you start small, you gain the chance to experience how values rise and fall — and rise again — for yourself. This may give you confidence and patience. 

Where to Start

Whether you are risk averse or loss averse, the best place to begin is by meeting with an experienced wealth management service today. They will help you find your preferred level of risk and learn to take appropriate advantage of all your modern investment choices. Contact a wealth management service to learn more.


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About Me
Credit Control: Tips For Managing Your Money

When I got my first credit card, I had no idea how to manage my money. I made a lot of mistakes that I later regretted and had to spend many years rebuilding my credit. I didn't realize that even one mistake can cause serious damage to your credit score. I did a lot of research into money management and credit repair options and put the effort in to rebuild my credit. This site is a compilation of the things that I've learned and the steps that worked for me. Hopefully the information here can help you to avoid some of the struggles that I faced.