The Changing Nature of Risk Aversion

Posted by Bull Bear Trader | 9/30/2008 12:43:00 PM | , | 0 comments »

There is an interesting article by Felix Salmon over at the Market Movers blog on how risk aversion is changing among retail investors. It used to be that when someone was risk adverse, they wanted to make sure that their principal was protected, even if that meant giving up return. Now risk adverse investors are more worried about losing everything. Even if a nice product is offered that protects principal, it could be viewed as risky if the bank or institution offering it has the chance of going bankrupt. Riskier products, such as various types of index funds, might now be preferred. Even though they to can go down in value, and have been, the chances of them going to zero is smaller, so investors feel safer. I guess this is comparable to the current demand for gold coins. Even if gold goes down in value, investors still have something in their hand beyond just a worthless stock certificate or bank statement.