(BPT) - When it comes to finances, Americans have a tendency to play it safe and are generally risk averse. According to the latest findings from Northwestern Mutual’s 2019 Planning & Progress Study, nearly three-quarters of Americans (72%) report they are more comfortable reducing risk to ensure the safety and stability of their savings and investments, even if it means the potential for lower returns.
This tendency to protect financial investments is positive, but it’s also important to understand what’s driving some of these instincts — is it based on people’s comfort level with understood risks, or does it come out of an uncertainty or lack of awareness about the level of risk they’re taking?
It’s a nuanced question, but it’s an important distinction. For example, if you’re told that a snowstorm is coming without details of its path or location, it’s hard to know how best to prepare. With limited information, you may take extreme or unnecessary measures.
This can happen with personal finances as well. People may not be fully aware of the scope of risk or potential options, so may opt for caution, even at the risk of lower returns. More knowledge and information can lead to a better understating of actual risks, which can lead to greater confidence about your choices. Put another way, with more certainty you’re in a better position to prepare appropriately for pending storms.
As you start thinking about your New Year’s resolutions, consider these tips to improve your understanding of financial risk:
- Have a plan: A plan helps you stay on track with your financial goals and can also work as a paradigm for your decision-making process. Northwestern Mutual’s recent research found that those who considered themselves to be “highly disciplined” planners have a higher risk tolerance on average compared to those who are “informal” planners.
- Work with a professional: Financial experts can provide helpful information and guidance. Research confirms that those who work with an advisor report a higher risk tolerance than those who do not seek professional advice.
- Address risk in your portfolio: The start of a new year is a good time to re-evaluate your portfolio to make sure it aligns with your individual risk tolerance and keeps you on track for your long-term goals. There are a number of products on both the investment and protection side that are designed to help manage risk.