Individual investors tend to equate “risk” with loss of capital. That definition of risk may lead an investor astray and prevent the investor from reaching his or her goals. This article proposes a different definition of risk and explains how prudent management of risk is essential for meeting the investor’s goals. Investors cannot avoid risk, and there is no such thing as a “risk-free” investment.
The questions addressed by this article are:
1. What is the most useful definition of “risk’ for individual investors?
2. What types of risk are most relevant for individual investors?
3. Is there such a thing as a risk-free investment?
4. How should an individual investor:
- Think about the role of risk in his or her investment strategy?
- Assess his or her risk tolerance?
- Use risk to enhance investment returns?
- Manage risk?