Managing risk means more than being “comfortable” with an investment. Too many investors seem perfectly comfortable with too much or too little risk. The basic premise to remember about risk is that it rises as the potential return increases. Higher risk investments mean more potential return on the capital invested. Remember that first word, potential. Another way of saying this is the higher potential return means the higher risk of losing money. Does that mean we should avoid all high-risk investments? No. It means we diversify our portfolio with a lower percentage of higher risk (and potential higher return) investments at top of the risk pyramid. We invest only as much money as we can afford to lose because we might in fact lose it. That’s why it’s important to recognize the risks inherent in our investment portfolio.
Chris Bryant is an American financial advisor.