What is risk?

At Robinhood, we want you to invest only when it’s right for you. All investing involves risk, and even though we want your investments to increase in value, it’s not something anyone can guarantee. When you invest, you may get back less than you initially invested.

When we refer to risk in investing, we are generally referring to the market ups and downs that your investments will experience, also known as volatility. A number of factors can affect how the stock market performs, including economic and political conditions. This, in turn, will affect your investments. This risk is out of your control (and ours) but what you can control is how much risk you are willing to take.

Keep in mind, Robinhood doesn’t provide financial advice. If you’re not sure what investments are right for you, consider contacting a qualified financial adviser for help.

Different assets carry different levels of risk. For instance, government bonds generally carry a lower level of risk than stocks. Generally, investments that offer higher potential returns will come with a higher level of risk. When you are thinking about what assets you want to invest in, you should consider how much risk you are willing to take. Make sure you’re comfortable with the balance between risk and return with your investments.

To help you determine what risk you are comfortable with taking, consider your financial goals, your time horizon, your financial situation, and comfort level with market fluctuations.

Consider what your financial goals are, and how long you want to invest for can help you determine the level of risk to take. For example, if your goal is to save enough for a deposit to buy a house in the next couple of years, you may have a lower risk tolerance. However, if your goal is to save for retirement, you’ll have more time for your investments to recover from market fluctuations and will likely have a higher risk tolerance. Note that this is just an example and may not accurately represent everyone in these positions.

Your personal circumstances may also change due to life events, economic conditions, or evolving financial goals. It’s important to review your portfolio regularly and adjust your risk exposure accordingly. If you find yourself getting stressed, or anxious about investing, for whatever reason, consider reducing your investment risk.

A key question to ask yourself is can you afford a loss? Make sure you have enough cash set aside to cover possible emergencies. Generally, your emergency fund equals 3 to 6 months of your living expenditures. Otherwise, you might need to use your investments on short notice, and in a down market, you’d have to sell at a loss. However, if you have cash set aside, you’ll likely be more able to wait and sell your investments when you want to.

You have probably heard the saying “don’t put all your eggs in one basket.” This also applies to investing! One way investors try to mitigate risk is through diversification. If you hold a range of different assets, like cash, stocks, bonds, or commodities, some may perform well while others don’t, potentially balancing each other out.

Think about your investment portfolio as a garden. If you plant only one type of flower, it may look beautiful when they are all bloomed, but if something happens to it, like a pest or a bug, then your entire garden will suffer. However, if you plant other types of flowers with different characteristics and resilience to soil and weather conditions, your garden will still remain beautiful even if one flower may suffer.

You can also diversify within the same asset type. For example, if you choose to hold stocks, you can consider investing in different locations and sectors. This way, if an event affects a particular region, and your investments in that region decrease in value, you would still have investments elsewhere that may not be affected by this event. Or at least, not in the same way.

However, as with everything, balance is key. If you spread your money over too many different types of assets you may dilute potential returns from the higher performing assets and make it difficult to keep track of your investments. Diversifying is important to manage risk, but over diversifying will make your portfolio too complex and difficult to manage.

When you invest, make sure you’ve done your homework first. Investing wisely requires research and informed decision making. For example, when you buy a computer, you want to make sure that you understand what the features of the product are so you know if it's worth the money. Similarly, when investing, you should make sure you understand what you are investing in. You can have a look at things like financial reports, market trends, and how investments have done in the past (although, past performance is not a reliable guide to future gains). It's also useful to keep up with what's happening in the world that might affect your investments.

When choosing your investments, make sure you take your time, gather relevant information, and consult with financial experts if needed before making any decisions. Remember that Robinhood does not offer financial advice, but there are a lot of resources online and elsewhere that can help you make your decision.

Spending some time thinking about your goals and learning about your options can make a big difference in making smart choices with your money.

We have a lot of resources that can help you.