Investment Risk

Understanding Investment Risk

Investment risk refers to the possibility of losing some or all of your original investment. All investments carry some degree of risk. Understanding these risks is essential for making informed investment decisions and managing your portfolio effectively.

Types of Investment Risk

Market Risk

Market risk, also known as systematic risk, affects the overall market. This includes economic recessions, political instability, and natural disasters. Market risk cannot be eliminated through diversification alone.

Volatility Risk

Volatility refers to how much a stock's price fluctuates over time. High volatility means the price can change dramatically in either direction. While volatility creates opportunities, it also increases uncertainty.

Liquidity Risk

Liquidity risk occurs when you cannot buy or sell an investment quickly without significantly affecting its price. Some stocks trade infrequently, making it difficult to exit a position when needed.

Inflation Risk

Inflation risk, also called purchasing power risk, is the danger that your investment returns will be eroded by inflation over time. If your returns don't exceed inflation, your purchasing power actually decreases.

The Importance of Diversification

Diversification means spreading your investments across different asset classes, sectors, and geographic regions. While it doesn't guarantee profits or protect against all losses, it can help reduce the impact of poor performance in any single investment on your overall portfolio.

Assessing Your Risk Tolerance

Risk tolerance varies based on factors such as your age, financial goals, income stability, and personal comfort with uncertainty. Understanding your risk tolerance helps you build a portfolio that matches your comfort level while working toward your financial objectives.