The Risky Business Of Investing

What makes investing so risky?

Investing will always be risky since nothing is guaranteed, but you can choose a combination of assets that makes investing less risky.

Diversification is a technique used to manage risk by adding different types of investments to a portfolio.

Photo by conorwithonen, courtesy of flickr

Diversification is not just creating a portfolio of ten stocks instead of two. To maximize the benefits of diversification, a portfolio should contain a mix of assets (bonds and stocks).

Within each asset class, there should be more than one type of security.

The choices should contain issuers who face different types of risk, or varying degrees of the same risk.

Combining the various securities will never completely eliminate risk, but it can balance the risks.

Here are some different risks that issuers may face: interest rate risk, inflation risk, sovereign risk, exchange rate risk, business risk, financial risk, liquidity risk and political and regulatory risk.

Some companies face all of these risks, while others face just a few. By picking companies with different levels of risk exposure you may be able to achieve average returns while assuming lower than average risk.

Risk comes in many forms, some of which cannot be escaped. Diversify with risk in mind and never put all of your eggs in one basket!