Volatility
Volatility describes how much an investment's price or returns have moved over a period of time.
INVESTMENT RISK
Understand Investment Risk and Make Smarter Portfolio Decisions
Investment risk is part of every financial decision. Learn how market volatility, inflation, interest rates, credit quality, liquidity and concentration can affect investments and how thoughtful portfolio planning can help manage those risks.
Market Risk
Portfolio Risk
Risk Management
PORTFOLIO RISK
RISK AWARENESS
LOWER RISK
HIGHER RISK
UNDERSTANDING RISK
Investment risk is about more than short-term market movements.
Investment risk is the possibility that an investment may lose value, generate a return below expectations or fail to meet a financial objective. The type and level of risk can vary significantly between investments.
Stocks may experience sharp price movements, bonds can respond to changes in interest rates and issuer credit quality, and cash can lose purchasing power when inflation rises. Real estate, commodities and other assets have their own risk characteristics as well.
Understanding these differences can help you evaluate investments based on your goals, time horizon, financial circumstances and ability to handle losses rather than focusing only on potential returns.
Risk cannot be completely removed
The objective is to understand, evaluate and manage the risks you take.
TYPES OF INVESTMENT RISK
Know the risks that can affect your portfolio.
Investment risk can come from several sources. Understanding the major risk categories can make it easier to evaluate an investment before adding it to your portfolio.
01
Market Risk
The value of an investment can decline because of broader movements in stock or financial markets.
Explore Market Risk →02
Inflation Risk
Rising prices can reduce purchasing power and make future investment returns worth less in real terms.
Explore Inflation Risk →03
Interest Rate Risk
Changes in interest rates can affect bond prices, borrowing costs and some interest-sensitive investments.
Explore Interest Rate Risk →04
Credit Risk
A bond issuer or borrower may fail to make scheduled interest or principal payments.
Explore Credit Risk →05
Liquidity Risk
An investment may be difficult to sell quickly at a price close to its estimated or recent market value.
Explore Liquidity Risk →06
Concentration Risk
Holding too much of one company, sector, asset class or geographic market can increase portfolio vulnerability.
Explore Concentration Risk →RISK AND RETURN
Potential return and investment risk are closely connected.
Investments with greater long-term growth potential can also experience larger price movements. Understanding that relationship is an important part of building an investment strategy.
GROWTH POTENTIAL
Higher Potential
Stocks and other growth-oriented investments may offer greater long-term return potential while also experiencing larger short-term fluctuations.
RISK
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RETURN
Balance your strategy around your own circumstances.
STABILITY
Different Risk Profile
Cash, bonds and other investments can have different risk and return characteristics and may serve different roles within a portfolio.
EVALUATING INVESTMENT RISK
Look beyond returns when evaluating an investment.
Historical returns alone do not tell the complete story. Investors can also consider volatility, drawdowns, time horizon, diversification and liquidity when assessing an investment.
Drawdown
A drawdown measures a decline from a previous peak and can help illustrate potential downside during difficult market periods.
Time Horizon
The amount of time before you need the money can influence how much market fluctuation may be practical for your situation.
Diversification
Spreading investments across different holdings and asset classes can help reduce reliance on any single investment.
UNDERSTANDING RISK
RISK TOLERANCE
Your portfolio should reflect your ability to handle losses.
Risk tolerance describes how comfortable you are with investment losses and market fluctuations. It is different from risk capacity, which considers how much financial loss your financial situation can realistically withstand.
An investor may feel comfortable with market volatility but still have a short time horizon that makes a highly aggressive portfolio unsuitable. Likewise, someone with a long horizon may still prefer a more moderate approach.
01
Financial Goals
Know what the investment is intended to accomplish.
02
Time Horizon
Consider when the money may be needed.
03
Financial Capacity
Consider income, savings, debt and emergency reserves.
MANAGING PORTFOLIO RISK
Practical ways to manage investment risk.
Risk management is not about avoiding every investment that can lose value. It is about making deliberate decisions about diversification, asset allocation, liquidity and time horizon.
Diversify Your Holdings
Avoid relying too heavily on one security, company, industry or asset class.
Match Risk to Your Horizon
Consider the amount of time available before you expect to use the money.
Maintain Emergency Savings
An emergency reserve can reduce the need to sell long-term investments during an unexpected financial setback.
Review Asset Allocation
Portfolio weights can change as markets move, making periodic reviews useful.
Understand What You Own
Know how an investment works, what risks it carries and what could cause its value to decline.
Avoid Emotional Decisions
Short-term market movements can encourage impulsive decisions that conflict with a long-term strategy.
ASSET CLASS RISK
Different investments have different risk profiles.
There is no single investment that automatically fits every investor. Understanding the characteristics of different asset classes can help with portfolio construction.
Asset Class
Potential Role
Important Risk
Stocks
Long-term growth
Market volatility
Bonds
Income and diversification
Interest rate and credit risk
ETFs
Diversified exposure
Underlying asset risk
Mutual Funds
Professional portfolio exposure
Market and fund-specific risk
Cash
Liquidity and stability
Inflation risk
COMMON INVESTING MISTAKES
Risk can increase when investment decisions are rushed.
Good risk management is also about investor behavior. Avoiding common mistakes can help keep your strategy focused on your actual financial objectives.
Chasing Recent Performance
Buying an investment only because it recently performed well can expose you to the risk of making decisions based on past results.
Ignoring Diversification
A portfolio concentrated in a small number of holdings can experience larger losses when those investments decline.
Taking Too Much Risk
A portfolio may be unsuitable when its potential volatility is greater than you can financially or emotionally tolerate.
Ignoring Inflation
Keeping all long-term savings in low-return assets can expose purchasing power to rising prices.
Reacting to Headlines
Short-term news can encourage emotional decisions that may not fit a long-term investment strategy.
Forgetting Liquidity
Investments that are difficult to sell may not be suitable for money you could need in the near term.
FINANCIAL INSIGHTS
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FREQUENTLY ASKED QUESTIONS
Questions about investment risk.
Investment risk is the possibility that an investment may lose value or produce a return below expectations. Different investments have different sources and levels of risk.
Common types include market risk, inflation risk, interest rate risk, credit risk, liquidity risk and concentration risk. The importance of each depends on the investment and your financial circumstances.
No. Diversification can reduce the impact of a poor result from one holding, but it cannot eliminate market losses or every other form of investment risk.
Inflation reduces purchasing power over time. If an investment's return does not keep pace with inflation, its real purchasing power may decline.
Risk tolerance describes how comfortable you are with investment losses and market fluctuations. It differs from risk capacity, which considers how much loss your financial situation can realistically withstand.
Common approaches include diversification, appropriate asset allocation, maintaining emergency savings, understanding investments and reviewing your portfolio as your goals and circumstances change.
BUILD BETTER INVESTING HABITS
Understand risk before making your next investment decision.
Explore GrowthSmartly's investing resources to understand different asset classes, portfolio strategies and the factors that can affect investment outcomes.