Risk Management

All securities investments carry the risk of loss. The risk and return are directly related. Higher risk usually results in higher return. The goal is to reduce the risk without having significant impact on the return. Some of the risk can be eliminated or reduced with purchase of Treasury bonds, but that option is not available to the socially responsible investor.

The risk could be systematic, i.e. across the entire market spectrum, or unsystematic, which applies to the individual investments. The latter can be reduced by owning a variety of products or industry, but the former can not.

Systematic risk includes market risk, natural disasters, interest rate risk, inflation, politics, foreign exchange, etc. There are some other risks in this category, such as early call, prepayment, or reinvestment which are applicable to individual securities. Only way to avoid these risks is to stay out of market which is not an option growing wealth. However, some of this risk can be reduced by holding portion of investment money in cash or precious metals such as gold.

The unsystematic risk can be mitigated by diversification. These risks include company or business risk, default, liquidity, and opportunity cost. Most significant risk mitigation technique is to invest in mutual funds and ETFs across a wide market spectrum.

However, if the preference is to buy individual company stock, the business risk can be reduced by investing in companies which pay regular dividends and have solid cash flow in established industries.