Risk

The chance that an investment's actual outcome differs from what you expected, in either direction.

Example

A stock's price moving 3% in a single day is risk showing up, whether it moves up or down.

Important

Risk is not the same thing as 'the price went down.' A drop that recovers is volatility; money that never comes back is a permanent loss - confusing the two is one of the most costly mistakes in investing.

Related terms

• Volatility — How much and how often an asset's price moves, up or down, over a given period.
• Permanent loss of capital — Money that is gone for good - the business failed, the asset became worthless, or it was sold at the bottom and never bought back.
• Standard deviation — A statistical measure of how spread out an asset's returns are around their average - the common numeric stand-in for volatility.

Lessons that explain it

• Certainty on a date, and the ability to act — Cash does two jobs no other holding can do: it will be there in full on a known date, and it lets you act without having to sell something first. It pays for both by losing purchasing power, reliably. (8 min)
• Probability, not certainty — Every investment is a bet on a distribution of outcomes, not a prediction of one. Once you think in probabilities, a loss stops being proof you were wrong. (10 min)
• What risk actually means — Risk is not 'the price went down.' It's the chance the money never comes back at all - and those are two very different things to manage. (10 min)

All 578 terms in the Investing glossary