When most people hear the words risk and investing in the same sentence, they immediately think: “That sounds risky.”

And sure, investing does come with risk. But here’s what might surprise you: I believe the bigger risk is keeping all your cash in a savings account earning next to nothing. Thanks to inflation, your dollar today slowly loses buying power year after year. That means your “safe” choice could actually prevent you from living the lifestyle you want in the future.

The truth is, every financial decision comes with some level of risk. Whether you keep your money in cash, bonds, stocks, or real estate, each choice carries tradeoffs. The key is understanding them so you can make informed decisions and feel at peace with your money. 

Let’s break down the most common types of risk in investing.

Types of Risk in Investing

1. Liquidity Risk

Liquidity risk happens when your money is tied up and you can’t access it when you need it. 

• This often applies to investing in something that requires you to lock your money up for an extended period of time like private equity, hedge funds, or real estate investments. 

• If you want out, you may not be able to sell quickly, or at all, without taking a loss or facing some sort of penalty.

2. Inflation Risk

This is the sneaky risk because it eats away at your wealth slowly without you really realizing it. 

• If your money is sitting in cash or low yield fixed income or bond, it likely won’t grow as fast as inflation.
  
• Over time, this means your money buys you less and less giving you less purchasing power as time goes on.

3. Credit Risk

When you invest in bonds or debt (whether from a company, government, or individual), you take on credit risk. The risk associated with a borrower no longer being able to pay back their debts due to default and/or credit related issues. If that happens, you may lose your principal investments and/or the interest you were expecting. 

4. Market Risk

Market risk is what most people think of when they hear “investing risk” or when they think of the stock market as “risky”. It’s the risk that your investments will lose value due to volatility (the ups and downs) in the market. 

• Things that can cause volatility include changes in the economy, interest rates, tax policy, political or worldwide tensions, or even investor sentiment can cause swings. Much of this is far beyond our control. 

5. Concentration Risk

This risk is associated with investing in only one asset class and/or specific investment or “putting all your eggs in one basket”. The risk that comes along with a portfolio that is not diversified. If your portfolio relies on one stock, one industry, or even one type of investment, you’re exposed to more risk and ultimately more volatility. 

A lack of diversification leaves you vulnerable to losses that could have been a little bit more smooth otherwise. 

How to Manage Risk in Investing? Diversification.

Diversification means spreading your money across multiple asset classes like cash, bonds, stocks, and real estate so that no single investment can make or break your portfolio.

You have the power to control how much or how little risk you take on by the way you choose to invest your portfolio.

Here’s why it matters:

• Not all investments move in the same direction. When one zigs, another may zag.
  
• This balance allows you to participate in growth while helping protect your portfolio during downturns.
  
• Think of it as playing both offense and defense at the same time.
  

Everyone assumes risk in investing only means “losing money in the stock market.” But risk also shows up in other ways, like holding too much in cash, or not diversifying at all. There’s a balance to be had here for each and every individual net worth. 

Risk Is Everywhere, But You Can Be In Control 

Here’s the reality:

• There’s no such thing as a risk-free investment. There’s not one single asset class that will avoid all risk all together.
  
• Each financial decision carries tradeoffs, from inflation risk in cash to volatility risk in stocks.
  
• What matters most is how much risk you’re willing to take, how much risk you need to take to support your future goals and how you structure your portfolio to balance it.

That’s why diversification is your best friend. It doesn’t eliminate risk entirely (nothing can), but it helps you manage it smartly while still growing your wealth.

Before deciding where to put your money, it’s so important to understand the risks tied to each option. Ask yourself: What opportunities am I giving up by choosing this investment? How does this fit with my lifestyle and financial goals? And most importantly, how much risk am I truly comfortable taking on?