Being a smart investor means being able to manage risk, not trying to hide from it entirely. Since different investments have different types of risk, you have to choose what types of risk are appropriate for you and weigh the potential risk versus the potential reward. Before you begin evaluating your risk tolerance, become familiar with the types of risk. The first risk many investors think of is market volatility. The price of an investment will rise or fall in response to changing market conditions.
Some investments fluctuate in value more dramatically than others.
For example, stocks tend to be more volatile than bonds. Cash equivalents are generally the least volatile. Risk to Principal. As the market price of an investment fluctuates, your amount invested can go up or down. Principal is also directly affected by credit risk.