“Risk” is one of the most used and most misunderstood words in personal finance. When the media or financial professionals talk about investment risk, they’re often referring to volatility: how much an investment’s price has gone up and down over time.

An investment that has seen large price swings may be labeled aggressive or risky. One that moves more gradually is often called conservative. But volatility alone doesn’t define risk. True risk also includes the possibility that your investment could underperform expectations—or fail to meet your financial goals altogether.

At Mirus Financial Partners, we believe understanding risk is about seeing the full picture: what you’re investing for, how much uncertainty you can handle, and how to build a portfolio that helps you stay the course through market ups and downs.

You Already Know More About Risk Than You Think

Even without financial training, most investors understand the idea of risk. A company scandal can cause stock prices to drop. A competitor’s breakthrough product can shake up an industry. Broader events like recessions, wars, or policy changes can affect many investments at once.

Why Volatility Matters

Imagine two hypothetical investments of $10,000 made twenty years ago. Both average 10% annual returns. One earns exactly 10% each year; the other alternates between 5% and 15%. Even with identical averages, the steady performer ends up ahead because volatility can drag down long-term growth.

The takeaway: investments that swing wildly in value may require longer time horizons, and investors who might need cash soon, should be cautious about putting short-term funds into volatile assets.

This is a hypothetical example and does not reflect the performance of any specific investment. It assumes reinvestment of all earnings and does not account for fees, expenses, or taxes. Past performance does not guarantee future results.

The Many Faces of Risk

There’s no single kind of risk. Here are a few investors should understand:

• Market risk: Broad declines across the financial markets.
• Inflation risk: Rising prices erode purchasing power.
• Interest rate risk: Bond values fall when interest rates rise.
• Reinvestment risk: New investments earn less than maturing ones.
• Default (credit) risk: The issuer of a bond can’t make payments.
• Liquidity risk: Difficulty converting investments to cash without loss.
• Political risk: Policy changes or government instability that affect markets.
• Currency risk: Exchange rate changes that impact international investments.

Balancing Risk and Reward

In investing, higher potential returns generally come with higher potential risk. The challenge is finding the right balance for your financial goals, time horizon, and comfort level. There’s no single formula. It’s about understanding what level of uncertainty is acceptable to you and staying consistent over time.

How Much Risk Is Right for You?

Your risk tolerance is shaped by two things: your emotional comfort with volatility and your financial ability to absorb losses. A 30-year-old saving for retirement may take on more risk than someone already living on investment income. Regularly reassessing risk tolerance ensures your portfolio still matches your goals and stage of life.

The Power of Diversification

Diversifying is spreading investments across multiple asset classes and sectors. This is an investment strategy that helps manage risk. Different assets respond differently to market forces, which can help smooth overall performance.

Rember that diversification and asset allocation do not guarantee a profit or protect against loss, but they are useful tools for managing risk.

Diversification can also occur within asset classes. For example, large-cap and small-cap stocks may behave differently, as can Treasury, municipal, and corporate bonds. Mixing these can help reduce the impact of any single investment’s performance.

Knowledge Is a Key Part of Risk Management

Becoming an informed investor means understanding what you own and why. Review each investment’s objectives, fees, and risks—available in the prospectus or official disclosures—and consider independent research before investing.

Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the fund’s prospectus. Read it carefully before investing.

We May Be Able to Help Investors Balance Risk

Risk isn’t something to fear. It’s something to understand and manage. The goal is not to eliminate risk but to align it with your long-term financial plan. Mirus Financial Partners can provide guidance that may help investors navigate that balance, creating strategies that match their goals, time frames, and comfort with uncertainty.