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What is risk?

Why do we invest? A normal answer is usually founded on the idea that we invest to grow wealth. To do this, we invest our hard earned dollars which we hope will provide a return greater than what we invested in the first place. This means, we are being paid for something - that something is risk.

By investing, we are getting paid to take risk. Risk can come in a lot of forms, but typically, the more of it we take, the better the return we get… or more accurately stated, the better potential for return we have. Investment risk comes in different forms, primarily:

  • Investment Losses: the risk of losing the principal you've invested
  • Illiquidity: The risk that you will not be able to access that which you have invested because it is tied up in that investment and inaccessible to you

But there are other risks tied to investing, too. For example, there is the risk that, because of the investment strategy you have used, you don't have enough liquid assets to meet the goals you've laid out for yourself. There's also inflation risk - if you aren't willing to accept any risk of loss or illiquidity, you risk having less wealth in the future than you did today, measured not in total dollars, but in what you can buy with the dollars you have.

Despite all the risks that investors are plagued with, there are ways to maximize your wealth while reducing the risk you take. To do this, you need to consider all of the risks discussed above in the same conversation, not only coming up with an investment strategy that provides the best return profile for the risk of loss you are taking, but also considering your goals and needs and the liquidity required to meet them. There's a lot to consider and the variables are changing all the time, that's why it can be helpful to go through a professional financial planning process, where a 3d party, one experienced mitigating risk for investors, can help you understand the risk you're taking and how to reduce it.

Contact a Wealth Advisor today to get a better understanding of the risks your taking today!

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