01 What is investment risk?

When you make your first investment in the stock market, making more money is perhaps your top priority.

You want your investment to be an extra stream of income or even have the long-term goal of becoming rich.

But achieving this goal is no mean feat.

First, you need to avoid making any loss or at least limit it.

Investing guru Warren Buffet once said, "The first rule of an investment is don't lose money. And the second rule of an investment is don't forget the first rule."

Wise as Buffet, he sees risk management as the primary goal. So you may have a sense of how critical it is to your investment success.

So, what is investment risk exactly?

Investment risk is the uncertainty of your return on your investments. No one can promise you a surefire profitable investment, as gains might be erased in the blink of an eye.

Overall, investment risks can be divided into systematic risks and non-systematic risks.

Systematic risks refer to events that may trigger the entire market collapse, which may take the form of political, economic, and social shifts.

For example, the Fed's rate hikes belong to systematic risks, as the action may cause global stocks to fall. So your investments get affected, too.

Non-systematic risks are risks limited to a particular asset, including regulatory shifts, unexpected earnings, and top management changes.

For instance, a non-systematic risk occurs when the price of a stock you hold declines due to a negative earnings surprise of the company while the general market rebounds.

Investment risks mainly come from three sources:

First, is volatility.

Volatility exists in all asset classes. Some are considered more volatile than others, like certain stocks whose prices can go up or down massively in a short time.

Generally, returns and risks go hand in hand. More volatile assets typically have greater potential for higher returns.

Second, inflation.

As a type of asset, your savings are theoretically shrinking if inflation exceeds the interest rate offered by your bank.

Third, underperformance.

Risk, in essence, refers to the possibility of actual returns varying from expected returns or potential financial loss.

An underperformance risk occurs if the actual return is 8% or negative, lower than your expected 10% return.

To summarize, risks must be considered and properly managed when making an investment.

Remember, preserving the capital is an important consideration rule for every investor.