in our free newsletter.

Thousands benefit from our email every week.

One of things I've learned over the years in owning a business is risk assessment. Everything in life has risk. The only known is you will die someday and you'll pay taxes.

Maybe panic attacks I've had in the past have helped me become better at risk assessment, and in the process, become a better investor.

In business planning it's critical to know the possible risks, determine the possibility of those risks, and eliminate (or if not possible minimize) them. Successful business owners do risk assessment on a daily basis. Otherwise, they are soon out of business. Some risks aren't in your face obvious, either. Just like the economist theory popularized by Milton Fredman, “there's no such thing as a free lunch“. In investing:

There is no such thing as a risk free investment.

Every investment has risk. It might not be apparent what the risk might be.

Traditional textbook investment books list these possible risks when investing:

  1. Credit risk
  2. Market risk
  3. Liquidity risk
  4. Operational risk

In my opinion missing from this list is inflation, and opportunity risk.

Credit risk

This means the chance that the investment will default. Governments, such as the United States, have a fiat currency. They are also a reserve currency and have no risk to default. The debt limit debate was all theatrics.

The problem then isn't credit risk, but inflation risk (see below) with the government printing money. Businesses, on the other hand, can go bankrupt.

Meet Your Retirement Goals Effortlessly

The road to retirement may seem long, but with WiserAdvisor, you can find a trusted partner to guide you every step of the way

WiserAdvisor matches you with vetted financial advisors that offer personalized advice to help you to make the right choices, invest wisely, and secure the retirement you've always dreamed of. Start planning early, and get your retirement mapped out today.

Get Started

Market risk

Market risk is the price which can vary from day to day, and depending upon when you sell your security, could lose principal.

Most investors think this risk only applies to stocks, but it can also apply to bonds. For example, if you own a bond and sell it before maturity, it is possible you can lose principal.

Liquidity risk

Prosper for example is a great investment, but is very illiquid. If I needed the money, it could take months before I could liquidate notes. In addition, I could take a significant haircut (market risk) in the process.

Stop overpaying for home insurance

Home insurance is an essential expense – one that can often be pricey. You can lower your monthly recurring expenses by finding a more economical alternative for home insurance.

SmartFinancial can help you do just that. SmartFinancial’s online marketplace of vetted home insurance providers allows you to quickly shop around for rates from the country’s top insurance companies, and ensure you’re paying the lowest price possible for your home insurance.

Explore better rates

Operational risk

This type of risk happens from the running of a business, and the most common risk when owning one. Operational risk in a business can be in many forms and varies from business to business. Related to investing this could cause a loss in principal or future gains from say a server failure.

Inflation risk

This one is missing from traditional financial text books, and it is the one that's the most subversive. The way I define it is you can lose money in real terms. So if a bank CD earns 2% APR annually, yet the annual inflation rate is 3% — you've lost 1% of your money in real terms.

So while the credit risk is low for government issued treasury bonds, it does have inflation risk. Inflation is a man-made monetary policy. So the same government who issues those bonds has also the power to inflate its currency. This then renders the real yield to be negative.

Opportunity risk

This is another risk not commonly discussed when investing. This risk is could your money be working harder for you in another investment?

So while you might be satisfied with earning 3% in a CD that's “risk free”, would you be better of investing in a high yield bond that earns 8%, with a less than 5% risk of default to maturity? It's always important to get the best value for you money when you shop; why should it be any different with investing?

Asset allocation and investment diversification can also minimize this risk.

Follow These Steps if you Want to Retire Early

Secure your financial future with a tailored plan to maximize investments, navigate taxes, and retire comfortably.

Zoe Financial is an online platform that can match you with a network of vetted fiduciary advisors who are evaluated based on their credentials, education, experience, and pricing. The best part? - there is no fee to find an advisor.

About the Author

Larry Ludwig

Larry Ludwig

Freelance Contributor

Larry Ludwig is a freelance contributor for Moneywise.

What to Read Next


The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.