What is Risk-Seeking
Risk-seeking is an acceptance of greater volatility and uncertainty in investments or trading in exchange for anticipated higher returns. Risk seekers are more interested in capital gains from speculative assets than capital preservation from lower risk assets.
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BREAKING DOWN Risk-Seeking
Risk seekers understand, or should understand, the trade-off between risk and return. Generally, higher risk implies higher return potential, although the quality of the asset in question must be considered beforehand to ascertain whether there is sufficient return potential to justify the risk involved. Some types of assets that risk-seeking investors would be attracted to are small cap equities, arbitrage investments, emerging market equities and debt, currencies of developing countries, junk bonds and commodity futures, to name just a few.
Risk seeking might also describe an entrepreneur who is willing to give up the stability of salaried employment at an established company to start his or her own company in the hope of a greater financial and emotional payoff.
Risk-seeking behavior tends to rise in bull markets, when investors, encouraged by gains in the financial markets, are coaxed into thinking that the good times will continue. There is always a subset of risk seekers who orient their strategies around high risk-high reward investments. Others, however, may shed their discipline to chase momentum stocks, for example, or try their luck with a hot IPO that they know little about. Risk-seeking is an equal opportunity activity sought out by retail investors and professional fund managers alike, but it can go too far, as thoroughly demonstrated by the internet bubble burst of the early 2000s.
Risk-Seeking Versus Risk-Averse
Financial advisors endowed with common sense counsel their clients to minimize risk-seeking behavior with respect to their investments. In many cases, particularly for younger individuals, risk-seeking is part of an overall investment strategy, as risk assets can provide a boost to total portfolio returns. For individuals who need more certainty of funds for an imminent house down payment, college education or retirement, lower-volatility investments are recommended. Risk-averse investors would then look to assets such as government securities, blue-chip dividend stocks, investment-grade corporate bonds, and even certificates of deposit.