Are you concerned that you are not taking enough risk with your money and therefore you are losing potential returns? You are not alone. Many people look on with envy as their neighbours get rich of off one investing scheme or the other. In this post I will explain how we are all taking more risk than we actually think we are and how investing can actually be a way to reduce risk.

Let’s start with the obvious risk: you have the risk of losing your money in whatever you are investing in. But there’s more. You also have the risk of losing your primary source of income. You have the risk of a debilitating injury or illness, the risk of being defrauded or robbed, the risk of natural disasters, the risk that a side hustle could go horribly wrong and saddle you with debt, and so on. So why do I consider all these risks to be financial risks? It’s because your choice of investment significantly affects your ability to deal with these risks. If your investment portfolio does not have the right mix of assets to handle the occurrence of any of these unfortunate events then it is not a balanced portfolio.

Think of an investment portfolio as a tool to manage the uncertainty in life. For example, if you are an entrepreneur with an unguaranteed income, you may want to invest more in low risk financial instruments because you are already taking a lot of risk on the business side. However if you have a job with a decent income and job security, then you are losing potential gains by not taking on riskier financial assets.

In summary, how risky an asset is cannot be judged in a vacuum. It has so much to do with what’s happening in your life at the moment. And when picking assets for your portfolio, you need to ask yourself whether it reduces or compounds the existing risk in your life.