Risk management is the practice of identifying, evaluating, and taking steps to minimize or control the impact of potential financial losses. In investing, risk is inevitable — but managing it effectively can protect your wealth and improve your long-term returns.
Common risk management strategies include diversification (spreading investments across different assets), hedging (using financial instruments to offset potential losses), and setting stop-loss orders (automatically selling an asset when it falls below a certain price).
For example, instead of investing all your money in a single stock, you could spread it across stocks, bonds, and real estate. This way, a decline in one sector won't wipe out your entire portfolio. Risk management is not about eliminating risk entirely — it's about understanding your risk tolerance and making informed decisions to protect your investments.