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What is Risk in Investments?

Risk: the possibility of losing money (and how to handle it).

The uncomfortable truth

Every investment has risk.

Risk = possibility of losing money.

Low risk

Bank: 0% (rarely goes bankrupt) Government bonds: Very low Index funds: Low. Some years you lose, but long-term you win.

Medium risk

Large company stocks: Can drop 20%, usually recover. Mixed funds: Stocks + bonds = stable.

High risk

Small company stocks: Go up 200% or down 80%. Crypto: Bitcoin dropped 60% in 2022. Casino.

The golden rule

Higher risk = higher expected gains.

Safe (bank) = 2%. Risky (stocks) = 20% expected (or -50%).

How to handle

  1. Diversify. Use index funds.
  2. Invest long-term. 30 years wipes out drops.
  3. Don't invest money you need soon.
  4. Don't do trading.
  5. Don't do FOMO.