When people say investing is “risky,” what do they actually mean?
For most people, risk means “I might lose my money.” And that fear is real — we’ve all heard stories of people losing everything.
But in investing, risk is more nuanced than that.
Remember learning about cognitive biases in med school? Anchoring bias, confirmation bias, availability heuristic — all those mental shortcuts that can lead to diagnostic errors.
You can’t eliminate them completely. They’re part of how our brains work. But you can learn to recognize them, develop systems to counteract them (like differential diagnosis frameworks), and make better decisions despite them.
Risk in investing works the same way. There are different types of risk — some can be reduced with certain investment approaches, some just need to be understood and accepted. The goal isn’t to eliminate all risk. It’s to understand what you’re dealing with.
The main types of investment risk
Here’s what we’re actually talking about when we talk about risk in the share market:
Company-specific risk
What it is: One company fails or underperforms — bad management, scandal, product failure, bankruptcy.
Real-world example: Investing everything in a single company that goes bust.
Concentration risk
What it is: Too much exposure to one company, one sector, or one country.
Real-world example: All your money in tech stocks, or only in New Zealand companies.
Market risk
What it is: The whole share market drops — recession, financial crisis, pandemic. Everyone goes down together.
Real-world example: March 2020 when COVID hit and global markets fell 30%+ in weeks.
Volatility risk
What it is: Day-to-day or month-to-month ups and downs in portfolio value.
Real-world example: Checking your investment and seeing it’s down 5% this month, even though nothing fundamentally changed.
Inflation risk
What it is: Investment returns don’t keep pace with inflation, so money loses purchasing power over time.
Real-world example: Leaving money in a low-interest savings account while inflation runs at 2-3%.
Currency risk
What it is: Exchange rate movements affect the value of overseas investments.
Real-world example: US shares go up 10% in USD, but the NZ dollar strengthens, so returns in NZD are only 5%.
Liquidity risk
What it is: Not being able to sell an investment when needed, or only at a big discount.
Real-world example: Investing in property or a small private company with no buyer when you need one.
Sequencing risk
What it is: Bad returns happening at the worst possible time — like just before or after retirement.
Real-world example: The market drops 30% the year you turn 65 and start drawing down savings.
Behavioural risk
What it is: You become the risk — panic selling, FOMO buying, timing the market.
Real-world example: Selling everything in March 2020 when markets crashed, then missing the recovery.
How different investment approaches address these risks
Various investment strategies attempt to mitigate different types of risk. For example, globally diversified index funds are designed to address several of these:
- Company-specific risk and concentration risk are reduced by holding hundreds or thousands of companies across multiple sectors and countries
- Liquidity risk is generally low because large index funds hold frequently traded companies
- Inflation risk is addressed over the long term, as shares have historically outperformed inflation
- Some behavioural risks are reduced by removing the need to pick individual stocks
However, other risks remain regardless of investment approach:
- Market risk affects all share market investments when markets decline
- Volatility risk persists as markets naturally fluctuate
- Currency risk exists for any overseas investment
- Sequencing risk depends on timing and life stage
- Behavioural risk around panic selling can still occur
Understanding which risks different investment approaches address — and which ones remain — is an important part of investment education.
The bottom line
Risk in investing isn’t one thing. It’s a collection of different risks that vary depending on the investment approach.
Just like cognitive biases in medicine, you can’t make risk disappear entirely. But understanding the different types of risk is the first step in making informed decisions.
This is educational information about investment risk — not personal financial advice. Everyone’s situation is different.