One in three people in the US loses out on putting their money to work in investments because they’re afraid of losing money, 

Risk in investing is often seen as something to be avoided, yet we weigh risks every day. Whenever we do anything, such as swimming in the ocean, we weigh our needs, the potential rewards (the pleasure of swimming), and the potential risks (sharks!) to make a decision. For some of us, it’s never worth getting into that water. For others, surf’s up. And for others, they’re ready to take some risk, but only after they’ve thoroughly researched shark attacks (1).

Investing is like swimming in the ocean—you have to weigh the potential returns and risks: Might putting your money into an investment earn you more money? If so, how much cash are you willing to put down on that chance? There is always a risk you’ll lose your money. But there are ways to manage that risk—and avoid the fear that can hold you back from making sensible, strategic decisions.

In investing, risk is defined as the chance that an outcome (or investment’s actual gains) will differ from an expected outcome or return. And yes, risk includes the possibility of losing some or all of an original investment. Risk can be managed and even used to our advantage. Learning to manage risk will give you the confidence to invest in any environment—and yes, even swim with sharks.

First, ask yourself some questions to learn how much risk you can tolerate.

What’s your financial “personality”?

Do you tend to be more conservative with spending your money or more aggressive? Whether you take a personality test or simply track your spending, you’ll be able to assess how you use your cash (and how you feel about it).

How much of your lifestyle depends on the money you want to invest?

If your lifestyle isn’t impacted by what you invest, you might not be worried about a higher-risk investment. Otherwise, you might choose investments with lower risks involved.

How long do you plan to keep your investments in the market?

If you invest after you start your first big job at 25, your investments will have time to recover from losses from higher-risk investments. If you’re 75 and about to retire, you don’t have the luxury of time to wait for your investments to recover from a market drop.

Investors who have in-depth knowledge of investing can be more comfortable with risk, because they understand its pros and cons. Asking your financial advisor or your 

, or doing the research yourself can build knowledge and confidence.

When investors put money into a high-risk investment, they expect a higher return. But that’s not guaranteed—going for a riskier investment could mean losing more. That’s why investors talk about “potential”: a lower-risk investment, like bonds, has the potential for lower profit, and a higher risk, like stocks, has the potential for a higher profit (and the potential for a higher loss).

Some investors are willing to accept a smaller, more predictable return in exchange for a more stable investment with less risk. On the other hand, cryptocurrency investors accept potential higher returns for taking on the extra risk.

There are a few measures of risk, like volatility, which is how much a stock’s value—or the entire market’s value—fluctuates up and down (like the bumpy turbulence you experience in an airplane). Investors with short-term investments may pay close attention to the day-to-day price swings. For those who are investing long-term, it’s useful to look at historical volatility to help determine the chances of a company’s share value continuing to swing higher or lower.

A volatile stock that’s been in the news like 

 has a high % of return as well as a high % of risk. If you want a little less risk with your investments, on Magnifi you can simply search for “

 This high-risk asset has a high % of volatility. For some, cryptocurrency’s up-and-down swings are too risky; for others, cryptocurrency adds high-return potential to their portfolio.

 Shares in a company can bring high returns, either in appreciation or dividends. However, t’s possible to lose your investment. Stocks aren’t all the same, though: a big, blue-chip stock like Walmart has a lower % of volatility, but also a lower rate of return than an emerging biotech company.

 These are tangible things, like gold or buildings, with a high-income potential. They can have some high risk due to losses from changes in global economy or supply and demand.

 These investments make fixed payments on the principal investment. These do involve risk, from factors such as changes in interest rates to market valuations—the investor should always read the fine print. Treasury bonds are considered safer, because the US government backs them.

 like Treasury bills. With low risk comes low yield, compared to other investments.

There are ways investors can manage their risk and invest according to their tolerance.

Investors with a larger appetite for risk can satiate this hunger by looking for innovative stocks and industries, which are often accompanied by outsized returns. There’s a catch though — whenever the market hits a rough patch, these assets are often the first to go and fall the hardest.

Similarly, investors that are bullish long-term can use a pullback in prices to start their long-term buying again. The rate at which you buy back into the market is an excellent way to manage your risk. Rather than buying all at once, a risk-averse investor, who is also taking a risk by buying, can ease their way in and reduce their risk by spreading out their buying over a longer period of time.

When investors spread their investments across asset classes, they are using a diversification strategy to combine higher-risk assets (for income potential) with lower-risk assets (to help offset that risk). When some assets take a dip, others may go up in value, offsetting the loss. There is no “one size fits all” template for allocating the different kinds of assets, but traditionally a “middle of the road” portfolio has been made of 40% low risk, like bonds, and 60% high risk, like stocks. Choosing a mutual fund or ETF that focuses broadly on a sector you are interested in, also can help diversify, because you’re not putting all your money into one company.

Regularly reviewing your financial goals, risk tolerance, and strategies with your financial advisor or virtual AI investing assistant is essential to be able to choose the right mix of assets that will help you achieve your goals—and feel confident.

On Magnifi, you can search for investments that match your tolerance for risk:

Invest in funds with high returns and low risk

You have a 1 in 4,332, 817 chance of getting eaten by a shark, which is pretty low risk. “Risk of Death: 18 Things More Likely to Kill You Than Sharks,” Florida Museum, https://www.floridamuseum.ufl.edu/shark-attacks/odds/compare-risk/death/.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Get instant access to market data, trends, investing guidance, and on-demand analysis with Magnifi Personal.

Managing Investment Risk

One in 3 people in the US lose out on putting their money to work because theyre afraid of losing money, according to a recent survey by Magnifi. If fear of risking your hard-earned money is keeping you from investing, its time to look at managing your risk.

Table of contents

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