Risk Allocation
Risk is the chance/ possibility of not getting the expected profit or (sometimes) even a loss associated with taking a financial decision.
As a general thumb rule; The higher the risk the higher the return.
When you invest, there is always the possibility of losing your money. There is always a scenario of loss in any investment asset.
There is typically no “safe” or “100% guarantee/risk-free” if you see this RUN and don’t look back.
In investing, risks can be broadly classified into:
Systematic Risk: These are risks that affect all investment assets. This means once you invest, you already have taken these risks. Unfortunately, they aren’t diversifiable. No matter the number of investment assets you have, there are always there. These risks include Inflation, interest rate, market/political instability, etc.
Non-systematic Risk or Idiosyncratic: These are risks that are sector or industry-specific. They do not affect all investments. This type of risk can be managed, unlike systematic risks.
Since they differ from sector to sector or firm to firm, they can be reduced by DIVERSIFYING across asset classes, sectors and industries, and even countries.
Diversifying offsets the risk of a type of investment with other different investments.
Readings
How not to die -Paul Graham
