Investing, by its very nature, carries with it in interest rates, inflation rates, currency exchange rates, and managerial differences between companies, the risk that an investment will lose you money or that it will grow much more slowly than expected. Cash-equivalent investments, such as money market accounts, savings accounts, or government bonds are the least risky. Allocating assets widely hedges against the risk that certain asset classes will perform well while others perform poorly. To reduce financial risk to yourself, you must learn how to manage your investment portfolio well.
Interest risk is the risk that changing interest rates will make your current investment's rate look unfavorable. Management risk is the risk that bad management decisions will hurt a company in which you're invested. Before reducing risk, you must understand how much risk you can expect from each type of investment.
When deciding on an overall level of risk, you need to assess how you want to use the money from your investments in the future.


The first key to lowering risk is to allocate your money between different investment classes.
For example, if many investors begin buying corporate stocks, stock prices will rise; however, those investors may be selling bonds to fund their stock purchases, causing bond prices to fall. However, if you used the same amount of money to invest in only 1 company's stock, the company may perform poorly and drag your entire stock portfolio down with it. Systematic risk affects an entire economy and all of the businesses within it; an example of systematic risk would be losses due to a recession. Inflation risk is the risk that inflation will increase, making your current investment's return smaller in relation.
Credit risk is the risk that a debt instrument issuer (such as a bond issuer) will default on their repayments to you.
The risk level of a bond is therefore dependent on the credit worthiness of the issuer; a company with shakier credit is more likely to default on a bond repayment. Spreading investments between stocks and bonds will protect against the risk of either category performing poorly.


This hedges against the risk that a single company or industry will perform poorly or go bankrupt. Non-systematic risks are those that vary between companies or industries; these risks can be avoided completely through careful planning. Liquidity risk is associated with "tying up" your money in long-term assets that cannot be sold easily. The proportion of these allocations will depend on the level of risk you want to shoulder overall.



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