Introduction
All investments carry risk. Ignoring risk is financial negligence. Understanding risk allows you to make smarter choices, avoid losses, and align investments with goals and tolerance.
Types of Investment Risk
- Market risk: price fluctuations due to economic conditions
- Credit risk: default by borrowers or companies
- Inflation risk: money loses purchasing power
- Liquidity risk: inability to sell investments quickly
- Interest rate risk: changes in interest affect bond prices
How to Assess Investment Risk
- Understand the asset class
- Evaluate past performance (not a guarantee)
- Consider personal financial goals and timeline
- Determine risk tolerance
Risk Management Strategies
1. Diversify
Spread investments across asset classes, sectors, and geographies.
2. Balance Portfolio
Combine high-risk and low-risk assets to match comfort level.
3. Regular Monitoring
Adjust investments based on market changes and personal goals.
4. Avoid Emotional Decisions
Panic selling or overreacting to market swings increases losses.
Common Mistakes
- Ignoring risk entirely
- Overconcentration in one investment
- Chasing high returns without understanding risk
Conclusion
Investment risk is unavoidable, but ignorance is worse. Evaluate, diversify, and manage risk deliberately to grow wealth responsibly.