Understanding Investment Risk and How to Manage It
When we hear the word risk, we often imagine things we should avoid. That viewpoint only considers the potentially negative aspects of risk. We believe the concept of risk is neither positive nor negative. We believe risk is a neutral concept – one we can seek to understand and use to our advantage and to achieve more.
The Many Types of Investment Risk
Your personal risk profile, shaped by your age, goals, lifestyle, income, and even personality, determines how much risk you’re both willing (risk tolerance) and able (risk capacity) to take on. These factors should influence how you build and adjust your investment strategy over time.
There’s no one-size-fits-all definition of risk because it comes in many forms:
Market Risk – Losses caused by overall market declines.
Inflation Risk – The possibility that your money’s purchasing power decreases over time.
Interest Rate Risk – The impact of changing interest rates on your investments, especially bonds.
Credit Risk – The chance that a borrower or issuer fails to meet their obligations.
Liquidity Risk – The difficulty of selling an investment quickly without affecting its price.
Concentration Risk – Having too much invested in a single stock, sector, or asset class.
Understanding these risks helps you make informed choices and avoid taking on more exposure than you’re comfortable with or more than is necessary.
Truth About Investing
Since investing and risk go hand in hand, we want to make sure we always set clear expectations for our clients. The truth is, the longer you invest, the higher chance you’ll experience a down market:
Much like our tendency to perceive risk negatively, this graphic only looks at half the story. The other perspective is the longer you invest, the more likely your investments will increase in value:
One of the most fascinating points of this second chart is that if you looked at your investments every single day, there would be roughly a 50/50 chance your investment would be up or down! History shows the longer an investment is held, the higher chance that investment is worth more than was originally invested.
We believe having a better understanding of these fundamental truths helps us “tune out the noise” which distracts so many from achieving their goals and having a positive investment experience.
How to Manage Risk in Investing
We will never be able to eliminate risk completely, but we can strategically manage it to work in our favor. Here are proven risk management strategies:
Diversification – Spread investments across different asset classes, sectors, and geographic regions to reduce the impact of a single poor performer.
Asset Allocation – Adjust your investment mix based on your goals, time horizon, and tolerance for risk.
Emergency Fund – Maintain an appropriate amount of liquid savings so you’re not forced to sell investments during downturns.
* Extra tip: Many of our clients hold their emergency funds in a high-yield, no fee cash account with us to earn significantly more than their standard bank account while retaining FDIC coverage. The current rate as of 8/15/25 is 4.00% APY. Send us a message if you’d like to learn more!
Time Horizon – The more time you have, the more market fluctuations you can ride out. Longer time horizons often allow for more growth-oriented investments.
Regular Portfolio Reviews – Periodically assess and rebalance your portfolio to ensure it stays aligned with your goals.
Insurance coverage – Protect against non-market risks like disability, death, or property loss that could derail your financial plan.
Why Working with a Financial Planner Matters
Even with a solid understanding of investment risk, emotions can cloud decision-making. News headlines, market volatility, or even casual conversations with friends and family can lead to fear-based choices that undermine your long-term goals.
A financial planner who is always obligated to act as a fiduciary can:
- Objectively assess your unique risk profile.
- Create a personalized, flexible investment strategy.
- Help you stay disciplined during market ups and downs.
- Monitor trends and adjust your plan as needed.
- Provide reassurance and perspective during uncertain times.
At Kinetic Wealth, we believe risk is not something to fear, but something to understand and use strategically. Our role is to help you navigate it with confidence, balancing your goals, resources, and comfort level so your investments work for you — not against you.
Risk is a permanent part of investing, but with the right knowledge, planning, and guidance, it becomes a powerful tool for building the future you desire. The first step is understanding your personal risk tolerance and how to manage it effectively.
Ready to turn risk into opportunity? Contact us today to create a plan designed for intentional growth and peace of mind.