Investing in the stock market is not a free lunch. You take risk in order to get a reward. If anyone else tells you there is free money out there, then it is very likely a scam. Risk is something you not always see.
When you start to invest, it is hard to understand what risk is. Very often, people call volatility the risk they take. Volatility are the prices that move up and down. When they are down, the portfolio is worth less than they paid for. Is that risk? Not to me, that is a paper loss.To be fair, it took me quite some time to reach that point. It is no fun to see investments that are worth less than the initial price.
What is risk then?
To me, risk is not getting the expected result. You make investments with a given goal. For a lot of people, the expected result is a positive return on their investments, higher than the rate of inflation. There are people that even put a specific number on this, like 5pct or even more per year. Not everyone makes it explicit like this. It might be more general like maintain my lifestyle when in pension.
What are the items that can endanger your goal?
The asset you invested money in is now worth zero, nada, nothing. That is a risk. All your money is now gone. This risk can be mitigated by investing in a well diversified portfolio. The likelihood of loosing all is then limited. If that would happen, there are far worse issues ongoing.
Loosing when you are forced to sell
This would be a case where you are having a high expenses and your only source of money is your investments. In that case, you have to sell the assets. A paper loss can become a real loss at that time. A counter measure is to set aside an emergency fund to take care of the foreseeable needs for money. The future can not be fully foreseen. I would think that here you have to accept a certain amount of risk.
Investing at the all time high of the market
As I believe that in the long run the companies that make up our economy are creative and responsive, I do not see this as an issue. It could be that you invest at a local high, that will be followed by a new high a few years later. Especially if you reinvest the dividends from these companies.
When in buildup phase, the logical action is to dollar cost average. This way, You buy the lows and the highs.
Another action to take: rebalance your portfolio on regular basis.
A too conservative portfolio
People have a problem with paper loss and big drawdowns, thus they keep all money in a savings account. This is a very big risk. There are very long periods where the interest on a savings account can not keep up with expectations, let alone with inflation. You then risk not to reach your goals.
Today in Belgium (Jul 2016) the interest is lower than inflation. Keeping cash means loosing money. Do I say: no savings? Hell no!! See the point of emergency savings above
Asset Allocation is important. Find one that matches your goals and risk tolerance: what paper loss can you sustain. If your portfolio is too aggressive, then you can be lured into bad behavior by selling at the bottom.
By taking the above elements into consideration, you can reduce the risk of your investments. You can give yourself a good probability of success. Especially if you are in a wealth accumulation phase.
The last risk might be a too high expected return of your portfolio. Do not expect the returns to be the ones from the good periods like 2009-2015. This is not realistic, This is dreaming.
What is risk for you?