Understanding Investment Risk

The podcast episode explores investment risk, emphasizing a view based on probabilities rather than just harm or danger. Key concepts discussed include market risk, unsystematic risk, inflation risk, interest rate risk, liquidity risk, and concentration risk.

Measuring risk involves understanding standard deviation (volatility) and managing downside risk. The discussion differentiates between risk tolerance (influenced by personal circumstances and time horizon) and risk capacity (financial ability to withstand losses).

Diversification, both across individual assets and asset classes, is presented as a way to mitigate risk, though over-diversification can be inefficient. Common investor mistakes include emotional investing and overconfidence. Strategies like hedging with options or using inflation-protected securities can help manage specific risks. The current economic climate highlights the impact of uncertainty, reinforcing the need for a structured, planned approach to investing to navigate potential setbacks and capitalize on gains.