2) Risk and Diversification: What is Risk?
Risk is everywhere, whether doing something as mundane as drinking, walking, or whether investing. Your comfort with risk is generally correlated to your personality and lifestyle. If you have chosen to invest in stocks but have trouble sleeping at night, then you are likely taking on too much risk. There is a lot more risk involved than you would willingly assume when it comes to investing in stocks, bonds or any other investment instrument.
Risk can aptly be described as the probability that an investment’s actual return turns out differently than expected, which includes losing a portion or all of the amount originally invested.
For those of us who work hard for every penny, there is a natural aversion to parting with money. It is therefore correct to say that people who have less disposable income tend to be more risk averse. Conversely, day traders are risk lovers, in that they feel if they aren’t making dozens of trades a day, then there is a problem.