Risk

Every investment involves risk. If you are willing to take thoughtful risks when investing, you can build a fortune over time. The better informed you are, and the more you know about the dangers, the less you have to worry about. The three most significant risks in investing are market risk, entrepreneurial risk, and liquidity risk:

Market risk describes the possibility that a significant external circumstance, such as war, political regime change, natural disaster, or pandemic, will negatively impact the financial markets. The best way to address market risk is with a diversified portfolio to spreads risk widely.

Entrepreneurial or business risk can occur when a company gets into trouble or even goes bankrupt. But, again, the easiest way to mitigate this risk is to diversify your portfolio. If no single company makes up more than 5 percent of a portfolio, even its insolvency can’t hurt you.

Liquidity risk refers to the risk of having to liquidate assets on unfavorable terms or even of a company or country becoming insolvent. To minimize this risk as much as possible, you should invest in reasonably liquid assets.