All investments carry risk. Risk is the chance that your investment may lose some, or even all of its value. 

Different investments carry different levels of risk. Some investments, like stocks, can carry more risk. The bigger the potential risk, the bigger the potential payoff or loss. Other investments, like money market funds or CDs, can carry less risk. Understand the type of investment you're in and the risk they carry. Only invest as much money as you can afford to lose.

What Are the Different Kinds of Risk?

There are many different kinds of risk. Market risk is the chance your investment value may rise or fall because market conditions. Business risk is the chance that corporate decisions, like a merger, will impact the value of the investment. There are also risks related to how hard it is to access your money, called liquidity risk, or that you may be overly concentrated in one type of product or market, called concentration risk.

There are also risks that relate to different types of investment strategies, such as lower-risk income or growth strategies to higher-risk speculative or aggressive growth strategies.

How Much Risk Should You Take?

You cannot eliminate risk from investing and there is no one right answer to how much risk a person should take when investing. Understand your own risk tolerance and the amount of risk that you're willing to accept.

Your risk tolerance is impacted by the following factors:

• Investment Objectives: Understand what is it that you want to achieve with your money. If you want to grow your money, you may need to take on additional levels of risk. However, if you want to preserve your assets, you might choose lower risk investments. Investment objectives should reflect your needs and desired goals, as well as the risk you are willing to take.
• Investment Needs: Are any of these funds essential, either now or in the future? Do you want to retire? Buy a house? Fund your child’s college tuition? Go on vacation? Each of these goals may impact how much risk you are willing to take. When deciding whether this is money you can truly afford to lose, consider your financial circumstances and needs, including routine or periodic expenses, emergency expenses, or potential long-term expenses.
• Time horizon: Understand when you will need your money. Generally, if you have a longer time horizon, you may be able to take on more risk. If your timeline is short, however, you may need to decrease the level of risk to ensure that you have assets available to use. Be sure to consider the liquidity of an investment, or how quickly you can convert the investment to cash.
• Personality: Are you a generally risk-taker or more cautious? Understand how much risk you are comfortable taking in addition to how much risk you can afford to take. Consider how you would react if the market took a significant downturn.
• Other factors: Income, taxes, children, and partners can also impact your investment objectives, time horizon, and needs. Sometimes partners, even those who generally agree on finances, can have different tolerances for risk.

Regularly reassess your risk tolerance. How much risk you are willing to take may change as you age or experience life events like getting married, having children, or changing careers.

Managing risk

You cannot eliminate risk, but there are things that you can do to help manage it. Diversification is owning a wide variety of investments with different characteristics or markets. Changes in the market will not affect all investments the same way. Diversification can limit the impact of changes in the market.

There are many ways to diversify your investments. Retail investors often turn to mutual funds and exchange-traded funds as a way to achieve diversification. Reviewing and rebalancing your investments is important to maintaining a diversified portfolio over time.

The Bottom Line

All investments carry risk. Understand your risk tolerance for investing and manage the risk of your investments.