Nearly anything you might do with your money involves risk. The key is to understand, limit and manage risk in such a way as to accomplish your objectives no matter what happens. There is no investment that does not have one or more elements of risk. Yet, some of those with significant risk, such as real estate, common stock and closely held businesses, have the greatest potential for return. The only solution is to diversify, spread your funds around, carefully balancing one risk against another.

Will today’s money buy as much in the future? The risk that it will not is inflation risk. Just look at the costs of the many items you use every day. Compare their costs today with the costs of ten, twenty or thirty years ago. Thirty years ago, a first class postage stamp cost four cents. Today, the same stamp costs thirty-four cents. The costs of housing, automobiles, utilities, food, clothing, theater tickets, all have increased substantially through the years. Inflation robs the value of a fixed investment which stays level, such as savings account. The purchasing power of the principal sum is gradually eroded.

This is the risk that the real estate, limited partnership interest, stock, bond, or investment company shares which you have purchased will go down in market value after you purchase them. The market in general may fall and then rise, but your specific investment could fall and then NOT rise!

This describes what happens when a nation’s banking system suddenly collapses and its depositors cannot get to their money. While most U.S. lending institutions’ depositors are guaranteed by insurance assets held by a U.S. government agency, this does not mean that you cannot lose all your money in a bank. Bank and saving and loan insurance contracts only guarantee that, if the bank fails, you will get your money back, up to $100,000. That is provided that the government agency insurance funds that stand behind your deposits are sufficient to pay you. However, even if the guarantee works, it may be years before your money is returned; with no interest credited.

You can encounter this risk if you invest all or a major portion of your assets in a single business. Everything may sound perfect, but for some reason, the business fails. Perhaps the mine caved in, or the factory blew up, a key employee left or died, a major competitor appeared or a superior technology was discovered which made the whole company obsolete. Some well known businesses have done very well for years, or even decades, only to plummet in value due to a variety of circumstances.

This is a risk that you have invested your money in an asset that cannot be easily sold. During difficult economic conditions, a drastic price reduction may be required in order to sell your asset. Real estate and closely held businesses are notoriously illiquid. Events beyond your control or anticipation could cause an investment to become illiquid.

If you invest your funds in a long-term instrument at a fixed return, such as a bank certificate of deposit, bond or long term bond fund, there is a risk that if the interest rates rise the value of your investment will decline. The longer the maturity, the greater the risk.

If you are a professional practitioner, business owner or rental property owner there is also the risk that a law suit could attach and confiscate your investment assets. The more public and liquid the assets are, the more vulnerable they are. While this is not an investment risk, it nevertheless must be considered when determining how to title your holdings.