Risk in investing is not only the chance of loss - it is the chance that the money is not there, in the amount you need, when you need it.
The main kinds
- Market risk - broad prices fall and take your holdings with them.
- Concentration risk - too much depends on one company, one sector or one theme.
- Credit risk - a bond issuer or borrower fails to pay.
- Liquidity risk - you cannot exit at a fair price when you want to.
- Inflation risk - nominal returns do not keep pace with the cost of living.
- Behavioural risk - you sell at the bottom, or buy after a run because everyone else is.
Diversification
Diversification spreads exposure across holdings whose fortunes are not perfectly linked. It reduces the impact of any single failure. It does not protect against a broad market decline, and beyond a point, adding holdings adds complexity rather than protection.
Position sizing
The size of a holding matters more than the quality of the reasoning behind it. A position large enough that its failure would derail your plan is too large, however good the case for it looked.
Sequence of returns
Two portfolios with the same average return can end very differently if the bad years fall at different times. This matters most when you are withdrawing - a sharp fall early in retirement does far more damage than the same fall later. The SWP calculator on this site lets you see that effect.
An emergency fund comes first
Money you may need within a year should not be in a volatile asset. An accessible reserve is what stops a short-term problem from forcing you to sell long-term holdings at a bad moment.
Educational content. This article explains general concepts. It is not investment advice, does not recommend any security or scheme, and takes no account of your personal circumstances. Investments in securities are subject to market risks.