Risk (2024)

All investments carry some degree of risk. Stocks, bonds, mutual funds and exchange-traded funds can lose value—even their entire value—if market conditions sour. Even conservative, insured investments, such as certificates of deposit (CDs) issued by a bank or credit union, come with inflation risk. That is, they may not earn enough over time to keep pace with the increasing cost of living.

What Is Risk?

When you invest, you make choices about what to do with your financial assets. Risk is any uncertainty with respect to your investments that has the potential to negatively impact your financial welfare.

For example, your investment value might rise or fall because of market conditions (market risk). Corporate decisions, such as whether to expand into a new area of business or merge with another company, can affect the value of your investments (business risk). If you own an international investment, events within that country can affect your investment (political risk and currency risk, to name two).

There are other types of risk. How easy or hard it is to cash out of an investment when you need to is called liquidity risk. Another risk factor is tied to how many or how few investments you hold. Generally speaking, the more financial eggs you have in one basket, say all your money in a single stock, the greater risk you take (concentration risk).

In short, risk is the possibility that a negative financial outcome that matters to you might occur.

There are several key concepts you should understand when it comes to investment risk.

Risk and Reward

The level of risk associated with a particular investment or asset class typically correlates with the level of return the investment might achieve. The rationale behind this relationship is that investors willing to take on risky investments and potentially lose money should be rewarded for their risk.

You can learn about risks associated with specific investments by going to the Risk tab for each investment listed in our Investment Products section.

In the context of investing, reward is the possibility of higher returns. Historically, stocks have enjoyed the most robust average annual returns over the long term (just over 10 percent per year), followed by corporate bonds (around 6 percent annually), Treasury bonds (5.5 percent per year) and cash/cash equivalents such as short-term Treasury bills (3.5 percent per year). The tradeoff is that with this higher return comes greater risk.

And although stocks have historically provided a higher return than bonds and cash investments (albeit, at a higher level of risk), it's not always the case that stocks outperform bonds or that bonds are always lower risk than stocks.

Time Can Be Your Friend or Foe

Based on historical data, holding a broad portfolio of stocks over an extended period of time (for instance a large-cap portfolio like the S&P 500 over a 20-year period) significantly reduces your chances of losing your principal. However, the historical data should not mislead investors into thinking that there is no risk in investing in stocks over a long period of time.

For example, suppose an investor invests $10,000 in a broadly diversified stock portfolio and 19 years later sees that portfolio grow to $20,000. The following year, the investor’s portfolio loses 20 percent of its value, or $4,000, during a market downturn. As a result, at the end of the 20-year period, the investor ends up with a $16,000 portfolio, rather than the $20,000 portfolio she held after 19 years. Money was made—but not as much as if shares were sold the previous year. That’s why stocks are always risky investments, even over the long-term. They don’t get safer the longer you hold them.

This is not a hypothetical risk. If you had planned to retire in the 2008 to 2009 timeframe—when stock prices dropped by 57 percent—and had the bulk of your retirement savings in stocks or stock mutual funds, you might have had to reconsider your retirement plan.

Investors should also consider how realistic it will be for them to ride out the ups and downs of the market over the long-term. Will you have to sell stocks during an economic downturn to fill the gap caused by a job loss? Will you sell investments to pay for medical care or a child’s college education? Predictable and unpredictable life events might make it difficult for some investors to stay invested in stocks over an extended period of time.

Managing Risk

You cannot eliminate investment risk. But two basic investment strategies—asset allocation and diversification—can help manage both systemic risk (risk affecting the economy as a whole) and non-systemic risk (risks that affect a small part of the economy, or even a single company).

Hedging (buying a security to offset a potential loss on another investment) and insurance products can provide additional ways to manage risk. However, both strategies typically add (often significantly) to the costs of your investment, which can eat away at returns. In addition, hedging typically involves speculative, higher risk activity such as short selling (buying or selling securities you don't own), trading in complex products such as options or investing in illiquid securities.

The bottom line is that all investments carry some degree of risk. By better understanding the nature of risk, and taking steps to manage those risks, you put yourself in a better position to meet your financial goals.

Learn more about key investing topics.

Risk (2024)

FAQs

Risk? ›

: possibility of loss or injury : peril. 2. : someone or something that creates or suggests a hazard.

What best defines risk? ›

Risk is the potential for harm. It is a prediction of a probable outcome based on evidence from previous experience. The nature of risk and harm can vary in daily life, creating different dimensions of risk that are subject to the factors at play in the study.

What is the accurate definition of risk? ›

Risk is the chance or probability that a person will be harmed or experience an adverse health effect if exposed to a hazard. It may also apply to situations with property or equipment loss, or harmful effects on the environment.

Can I play risk for free? ›

About this game

Fight against the Axis Powers in WWI, survive war games against undead zombies and battle on fantasy, futuristic and sci-fi maps. Download RISK Global Domination for free now!

How does risk work? ›

The standard version is played on a board depicting a political map of the world, divided into 42 territories, which are grouped into six continents. Turns rotate among players who control armies of playing pieces with which they attempt to capture territories from other players, with results determined by dice rolls.

What is risk in simple words? ›

In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences.

Is risk a good or bad thing? ›

Risk isn't a bad thing. In order to achieve your goals you will need to take risk, just makes sure it's an appropriate level of risk that you can handle.

What is the modern definition of risk? ›

In its modern sense, the word risk has two distinct meanings: it can mean both the possibility of danger and simultaneously its potential consequences. The first definition emphasizes the source of the risk, while the second focuses on the target exposed to the risk.

What determines a risk? ›

The risk determination is based on the impact that would result from an event and the likelihood the event would occur. Monitoring risk factors is the maintenance aspect, and includes an ongoing situational awareness of the changes to information used by the organization when making a risk-based decision.

How do we define risk and how do we measure it? ›

Risk—or the probability of a loss—can be measured using statistical methods that are historical predictors of investment risk and volatility. Commonly used risk management techniques include standard deviation, Sharpe ratio, and beta.

When was Risk invented? ›

The French filmmaker Albert Lamorisse designed a board game with simple rules but complex interactions, La Conquête du Monde (The Conquest of the World) in 1957. Purchasing the rights, Parker Brothers published it with a few small changes as Risk in 1959.

What are all the different versions of Risk? ›

Contents
  • 1.1 Risk.
  • 1.2 Castle Risk.
  • 1.3 Risk 40th Anniversary Edition.
  • 1.4 Risk: 2210 A.D.
  • 1.5 Risk: The Lord of the Rings.
  • 1.6 Risk: The Lord of the Rings: Gondor & Mordor Expansion Set.
  • 1.7 Risk: Lord of the Rings Trilogy Edition.
  • 1.8 Risk Godstorm.

Is Risk a game of chance? ›

Risk is a complex board game produced by Hasbro that involves both luck and skill. The goal is simple: take over the world. Despite this simple goal, the game is very complicated and dynamic. Players attempt to take over the world by eliminating all other players.

Is risk a hard game? ›

Risk is a fun, challenging game, but it can be difficult to win. If you are new to the game, then you may have an even harder time of winning the game. The first thing you should do is make sure that you are familiar with the rules of Risk. For basics of gameplay, see How to Play Risk.

How long does a game of risk take? ›

A game of Risk usually takes around 2 hours, but it could take an hour or two longer if you're playing with all 6 players.

Can you play risk with two players? ›

This feature gives the 2-player version much the same strategic flavor as the regular RISK game. You and your opponent each select a complete set of armies. Then either of you selects a third set to be “neutral.” Take 40 Infantry pieces from each of the 3 sets and claim territories in the following manner: 1.

Which option best defines risk? ›

Which option best defines risk? The ISO definition of risk is simply "the effect of uncertainty on objectives." Uncertainty can be positive or negative in its effects.

What is the best way to describe risks? ›

Based on these definitions, a risk statement should look something like: [Event that has an effect on objectives] caused by [cause/s] resulting in [consequence/s]. An alternative two statement version is: [Event that has an effect on objectives] caused by [cause/s]. This may result in [consequence/s].

Which statement defines a risk? ›

A good risk statement will communicate three elements: The cause = why the risk is happening. The risk event = the actual risk that, if it happened could have an impact on the project. The effect (or impact) of the risk = what will happen if the risk realises.

What is the definition of risk quizlet? ›

Likelihood of injury or damage to property.

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