When reading through some book on management, I happened to come across a concept about types of managers. This classification was based on their perspectives of risk. There were three categories as obvious to any business student: the risk averse, risk neutral and risk seekers. Coincidentally, investors too can be classified into the three categories above depending on how they view risk.
Those investors who fear risks, and keep away from them and are the ones referred to as the risk averse investors. For these investors, returns are usually enticing but when too much risk is involved, they shy away. They are the kind of people you will find investing heavily in the safe havens: treasury bills and bonds, corporate bonds, fixed deposit accounts and other fixed income financial instruments.
There is this other group of investors who have a craving for risky investments and they would go to any length to acquire them. These are the guys we refer to as the risk seekers. For them, the more risky an investment is the more returns they see in it, and the more they want to get a share of the returns.
These investors don’t fear loosing money, rather, they are motivated by the returns they anticipate to get from those very risky investments. You will find them investing in risky ventures like the stock market, futures and derivative markets and also in hedging.
The last group is made up of investors who are indifferent to risk. Given two investment options with equal returns but different degrees of risk exposure, they would be indifferent as to which option to go for. These are the risk neutral investors. They take anything that goes as long as it has returns enough to satisfy their investment goals irrespective of their degree of risks.
Having that in mind, you should then keep in mind the following investment old adage: “The higher the risk, the higher the returns and vice versa.”