When it comes to investing, no one likes risk. Every investor hopes for the low-risk high-reward investment that will guarantee a return on their investment without having to risk anything in the process. Unfortunately, there is no such thing as a high yielding investment with no risk, and although you can reduce, manage and even hedge against risks to avoid them having too much of a negative impact on you and your portfolio, they cannot however, be eliminated altogether.

The fact is that risk is inseparable from return. Every investment involves some degree of risk and in order to utilize your capital to its maximum potential, rather than not invest at all, you should assess your risk tolerance level and create an investment strategy that fits your predetermined criteria. Some risks can be directly managed; other risks are largely beyond the control of company management. Sometimes, the most you can do is to try to anticipate likely risks, assess the potential impact they may have, and design a plan to respond to possible adverse effects.

People generally tend to think of risk in predominantly negative terms. However, in the investment world, risk is necessary and cannot be separated from the desired outcome. The fear of the unknown and the unpredictability of some investments has paralyzed many investors and has cost them millions in missed opportunities, in exchange for a sense of security for either their money, or themselves. As Robert Arnott said "In investing, what is comfortable is rarely profitable."

Knowing what risks an investment could be faced with in the future is the first step to being able to avoid, or at least minimize potential risks. Overall, there are several factors that could pose a threat to an investment. These fall into one of four primary categories:

Another element of market risk is the risk of being overshadowed by competitors in your specific field. If your company sells watches and a new brand of watches gains popularity, your sales could take a hit and you could be forced to either lower your prices, which could affect your bottom line. The same could happen with a real estate investment. A high demand for housing within a small community might transform into a serious over-supply problem when a competitor builds a new development.

Each risk factor has its own methods and techniques that investors use to eliminate or minimize the risk. For example, in order to avoid market risk, you could diversify your investments though various asset classes or invest in different markets or sectors. But diversification in itself will not protect you against operational risk. Your management team could still face internal challenges that could have a negative impact on your entire portfolio.

In an attempt to eliminate liquidity risk, you might choose to invest only in liquid assets such as stocks. And while you now own an extremely liquid portfolio, you are still exposed to other risks like credit risks that the companies you own could encounter as well as the various market risks that could affect them.

Investing long-term in assets with a proven track record of growth and profitability often minimizes the effects of short-term market volatility and difficulties.

In spite of this, knowledge and understanding in specific market situations can be a one size fits all solution to mitigate many of the risks you could face. Robert Kiyosaki in his bestselling book 'Rich Dad's Guide to Investing' writes, “In reality, investments are not risky, it’s the lack of education, experience and excess cash that makes it risky for the average investor”. And, while a certain element of risk always remains, these attributes definitely help when it comes to reducing risk. 

Your view of the future will heighten your risk tolerance as you may be prepared to take on more risk in the anticipation of a heightened return in the future.