Risk aversion

The Risk-Averse Investors

An investor who is risk-averse will always opt for a position that offers lower returns but with higher certainty, than a position that offers higher returns but comes with less certainty. When given a choice of different investment opportunities that offer the same return but with different forex trading risks, the risk-averse investor will prefer the alternative that offers the least amount of risk.

What Risk Aversion Means to Forex Traders

If you can be sure about one thing, it is the fact that all traders encounter some Forex trading benefits and risks when engaged in a trading activity. This is because no trader can predict for certain the direction the market will go. While technical analysis, combined with a good grasp of trading fundamentals, can help in suggesting and confirming good entry and exit points, there will always be the possibility that the market will not go to the predicted direction, but will instead go to the opposite direction – regardless of how much analysis work you put in!

Simply put, Forex risks will always be present. Yes, the more experienced traders may be able to manage and control risks more successfully by cutting their losses and taking their profits in a timelier manner as they stick diligently to their trading strategy.

Given that there will always be risks involved in Forex trading, how can you be risk-averse? The markets are usually in a continuously dynamic flux state, reacting to economic data, supply, demand, and other factors. However, there are some tools that investors can rely on in such uncertain times. These are called the safe havens that include gold, Japanese yen, and Swiss franc. These instruments are very popular to risk-averse investors due to various reasons.

  • Using Gold as Safe Haven – The value of the precious metal is hardly influenced by a given country’s interest rate policies and decisions. As a physical asset, gold also retains its value. Unlike paper money that is printed, gold’s supply levels are maintained at a relatively stable state.

Gold emerges as an even more enticing investment in the face of lots of news about the end of global economic stimulus, as well as the recently-announced hikes in interest rates in Europe and North America. Many traders count on gold to help tide them over during volatile times in the market as the price of gold usually increases during extreme global events and political crises such as the recent tensions between the US and North Korea.

  • Using the Swiss Franc and Japanese Yen as Safe Haven Currencies – The status of the Japanese yen as a safe haven is due in part to the country’s sterling record of debt levels. Japanese investors hold a significantly higher amount of foreign assets compared to the amount of Japanese assets held by foreign investors.

According to data released by the Finance Ministry of Japan, their net foreign assets is valued at an astounding 349 trillion yen by the end of 2016. That’s roughly US $3.12 trillion! During the last 26 years or so, Japan has kept its reputation as the largest creditor nation. At the same time, it has emerged as a leader in low interest rates. It has kept interest rates at very low levels for almost 2 decades in its efforts to spur economic growth and combat deflation.

On the other hand, the Swiss banking system has had the reputation of the perfect wealth storage for people from all corners of the globe due to their conservative policies. In addition, Switzerland has maintained a long history of duly paying its debts – without defaulting!

Switzerland is generally considered to be a politically stable country. No major changes happen even with the changing of regimes. Unlike the neighboring countries of Italy, France, and Greece, the country is likewise very stable socially. There are no major problems that might cause unrest and adversely affect its well-being and stability. Because of its reputation as being among the world’s very few genuinely neutral countries, Switzerland hasn’t figured in any conflict with another country in about 2 centuries. This allows the country to be held in high standing by other countries. Other nations help protect Switzerland from any external threat.

There is no argument that investments always come with a certain degree of risk. However, the three safe haven instruments discussed in this section will always be in high demand during uncertain times such as in cases of economic unrest, natural disasters, and threats of armed conflicts or war.

So, whenever you read or hear about an impending natural disaster or global tension, the markets will automatically become risk-averse. Thus, there will be a much bigger demand for safe havens.