Chicken

DEFINITION of 'Chicken'

An investor who is petrified of incurring losses from investing. A chicken will generally shun most investments, even low-risk ones, since almost any investment carries an element of risk. Treasury bills and bank deposits are favored investments for chicken investors, although they may even fret about the credit rating of the United States government or the likelihood of bank failures. Although chickens are highly cognizant of the perceived perils of investing, they may be oblivious to the insidious dangers of eschewing risk totally, particularly the loss of purchasing power during periods of moderate to high inflation.

 

BREAKING DOWN 'Chicken'

Many investors with adequate risk tolerance also turn chicken after a prolonged bear market, causing them to liquidate their holdings near the market’s bottom and miss out on the subsequent rally.

The biggest risk a chicken faces is the loss of purchasing power due to inflation over prolonged periods of time. This may leave them especially vulnerable during retirement, since the steady increase in life expectancies means retirees need a greater pool of savings to sustain themselves for longer periods of time. The rule of 72 demonstrates the pernicious effects of inflation. For example, at an annual inflation rate of 3 percent, the purchasing power of a currency is slashed by half in 24 years; at a 4 percent inflation rate, it is halved every 18 years. If inflation zooms up to 8 percent annually, purchasing power is halved in less than a decade.

A chicken investor may thus rue the decision to completely avoid risk in his or her younger days, since the ability to take on investing risk is inversely proportional to age. A chicken investor should therefore attempt to take on risk in measured amounts in his or her investment portfolio, and should use risk mitigation techniques to minimize risk.

Tried-and-tested investment techniques like diversification can bring down portfolio risk to an acceptable level for almost any investor. Since most investors equate risk with equities, a chicken investor could venture into the realm of investing by initially getting into fixed-income instruments and convertible bonds, before investing in index funds and blue-chip stocks.

 

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