Understanding financial risk is an integral part of making decisions about investing. Without adequate knowledge of financial risk, a consumer’s investment decisions may be based on misperceptions. Conversely, a sound understanding of financial risk may help consumers deploy risk-mitigation strategies, like diversification, and assess various investment products to identify those that align with their goals and risk tolerance._x000D_ To examine how consumers think about financial risk — as well as the relationships among risk comprehension, risk tolerance, and asset holdings — we fielded a survey to a nationally representative, probability-based sample. The survey gauged respondents’ financial risk comprehension, financial risk tolerance, asset holdings, recognition of risk-mitigation strategies, and specific risk-related investing concerns._x000D_ Results indicate that, while most consumers have a rudimentary understanding of investment risk, fewer are able to recognize risk-mitigation strategies. We find that those with higher risk comprehension tend to be more willing to take financial risk, and that investors and non-investors have different risk-related concerns about investing. We also find that investors’ risk comprehension and risk tolerance generally align with portfolio choices._x000D_ Findings suggest that consumers’ concerns about inflation and liquidity may be especially important for financial educators when beginning conversations about investment risk and how to manage it.
