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Basics of Risk Management

Avoiding investment traps

Protect your portfolio by identifying and managing financial risks.

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Introduction to Risk Management

Risk management involves identifying, assessing, and mitigating financial risks like market drops, economic downturns, or unexpected expenses. 

Recognizing these risks allow you to create strategies that protect your investments and maintain portfolio stability during volatile times. 

Throughout this course, we’ll follow Jane, a 32-year-old marketing manager from Chicago, as she begins her investing journey, balancing curiosity with caution to build a portfolio aligned with her goals.

Types of Risk 

Investing in markets involve several risks, including market risk from broad declines due to economic or geopolitical events, credit risk from borrowers or bond issuers defaulting, and liquidity risk when assets cannot be quickly traded without impacting prices. 

Other risks include interest rate risk, affecting bond prices and borrowing costs; currency risk from exchange rate fluctuations in international investments; and operational risk from failures in a company’s processes or systems.

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Jane Learns the Importance of Risk Management  

Jane vividly recalls her $20,000 Aurora Tech investment shrinking to $10,000 in days during a market slide. 

The panic was all too familiar—her dad’s job loss during the 2008 crisis still lingered in her memory. 

Determined to prevent history from repeating, she diversified, spreading funds across bonds, index funds, and savings. 

Months later, when tech stumbled again, her portfolio absorbed the hit gracefully. The relief reminded her why balance and foresight are key.

The Power of Diversification 

Diversification is a risk management strategy that involves spreading investments across various assets, sectors, or regions to reduce exposure to any single risk. 

By including a mix of asset classes such as stocks, bonds, and commodities, investors can offset losses in one area with gains in another. 

Diversification reduces the impact of market volatility, company-specific risks, and sector downturns, creating a more stable and balanced portfolio over time.

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Understanding Risk Tolerance 

Risk tolerance refers to the level of uncertainty and potential financial loss an investor can accept without feeling overwhelmed. 

It is shaped by factors such as age, financial goals, investment horizon, and personal comfort with risk. 

Younger investors often lean toward higher-risk assets like stocks to maximize growth potential, while those nearing retirement tend to prioritize lower-risk, stable investments to protect their wealth and ensure steady income during retirement years.

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