In broad terms, risk involves exposure to some type of danger and the possibility of loss or injury – whether that’s to your physical health, social status or something else. People face numerous risks every day, doing things like driving to work and texting while walking – or worse, while driving (please don’t). There are also risks that stem from things you aren’t doing (but should) – like getting enough sleep, exercising regularly and eating a healthy diet.
Of course, some activities are riskier than others. Certain adventure sports, for example – such as free climbing, BASE jumping, big wave surfing and bull riding (the “most dangerous eight seconds in sport”) – expose participants to higher-than-normal levels of risk. For many adventure enthusiasts, that’s the whole point. Still – no matter what risks you face – there are usually ways to lower the possibility of loss or injury, whether that’s learning to hold your breath as a big wave surfer or wearing a seatbelt as a morning commuter. (For more, see: 5 Investing Risk Factors and how to Avoid Them.)
Reality vs. Expectations
In the investing world, risk refers to the chance that an investment’s actual return will differ from the expected return – the possibility that an investment won’t do as well as you’d like, or that you’ll end up losing money. The good news: Like other dangers we face, it’s possible to manage investing risks – by learning what they are and by diversifying your portfolio. That way, one bad investment can’t do serious damage to your overall financial health. (See also: Common Risks That Can Ruin Your Retirement.)
To help you get started, this tutorial introduces risk and provides a good foundation for understanding the relationship between return and risk, as well as the importance of diversification. (For related reading, see: Calculating Risk and Reward.)