MEPX
Chapter 3 of 10All chapters
  1. 1Why invest at all
  2. 2Asset types
  3. 3Risk
  4. 4Diversification
  5. 5Costs and tax
  6. 6Time and compounding
  7. 7Behaviour
  8. 8How markets behave
  9. 9Products and pitfalls
  10. 10A sane starting point

Chapter 3 of 10

Risk

More than volatility.

Kinds of risk

Market risk affects everything at once. Specific risk belongs to one holding. Inflation risk erodes safe assets. Liquidity risk is being unable to sell when you want to.

  • Diversification handles specific risk and not market risk.
  • Volatility is not the same as permanent loss, which is what actually matters.

The relationship

Higher expected returns come with wider swings. Anything promising high returns with no risk is either misdescribed or a fraud, with no third option.