Levels and Types of Investment Risk
A clear guide to the levels and types of investment risk, with practical ways to measure and manage risk before committing capital to any opportunity.
By Diego Alcalá · Sat Jul 25 2026 · Investing
Having clarity about how to measure investment risk is fundamental to analyzing opportunities and building projects that grow your wealth over time. It is the starting point for making sound decisions based on the needs and the capacity of your capital.
To have greater control over an investment, you need to evaluate the possible risks and their magnitude. Only then can you gauge the impact any given scenario would have. Becoming aware of that risk pushes us to be far more selective about the projects we actually commit to.
In this piece I want to walk you through everything worth knowing about investment risk: what types exist, and a few practical ideas for minimizing them.
What is risk in an investment?
Investment risk can be defined as the probability that a return ends up lower than expected. In plain language, it is the chance that an investment fails to deliver the profitability you were counting on, or that the loss exceeds the initial amount you put in.
From that definition we can already draw two truths: every investment carries some degree of risk, however small, and, generally, the greater the expected return, the greater the risk. There are ways to prevent, insure, or hedge against these risks, but to use them we first have to understand and classify the levels and types of risk that exist.
Levels of investment risk
Among the many ways to classify an investment by its level of risk, this is the most common and the easiest to explain from an investor's point of view.
1. Low risk
At this level the chances of losses or default are small. Think of instruments backed by major banks or by governments, such as short-term treasury bills, which tend to offer greater stability, a solid track record, and higher reliability. While they give your capital more security, they usually generate modest gains. This level is ideal when your priority is to safeguard your capital while earning just enough to protect it from inflation.
2. Medium risk
Unlike low risk, at this level you commit a larger share of your capital, which implies greater commitment and a more detailed analysis of the situation. Return expectations are more meaningful here, and it requires real knowledge of the operation and the markets involved. A classic example of medium risk is real estate. Even though property is the industry where capital most often parks itself, there are many types of real estate investments, each with different purposes and profiles.
Not every real estate investment is good in and of itself; the moment of purchase matters enormously. Here I like to quote one of my favorite books, The Most Important Thing:
- No asset is so good that it can't become a bad investment if bought at too high a price, and few are so bad that they can't be a good investment if bought cheaply enough.
— Howard Marks
3. High risk
This is the level that offers the highest returns, yet it is more volatile and the risk of default or loss is greater. Today, almost any private equity investment in a company can be classified as high risk, given generally competitive market conditions and company life cycles that keep getting shorter.
Investors who operate at this level are (hopefully) prepared and sufficiently informed. One countermeasure to minimize risk is having a contingency plan for losses. That can take many forms: hedges, insurance, a plan B, and so on.
It is worth saying that reducing everything to just three levels of risk is a simplification, but it is a good way to start categorizing any potential investment decision from the outset. The quality of the questions we ask ourselves and the other party before investing, along with proper due diligence on the industry, the people involved, and the macroeconomic environment, is what lets us tell a good investment from a bad one. We should never judge an investment decision solely by its outcome, but by the analytical process that preceded it.
Types of investment risk
Now that the levels are clear, let me go deeper into how the different types of risk are classified, with a few examples to help you cut the odds of losing money on a bad deal.
1. Systemic or market risk
Market or systemic risk, also known as non-diversifiable risk, is the one that affects the market as a whole regardless of the company or asset you invested in. Think of the disruption of 2020 during the pandemic, or armed conflicts that ripple through the global economy and trigger periods of crisis for many countries.
2. Non-systemic risk
Also known as diversifiable risk, this type affects a specific company and is driven by factors particular to it, factors that only condition the profitability of its own shares. Examples include weak corporate results, sales data below expectations, a new product from a competitor, or poor management. Think of the streaming platforms and the ferocious competition in that sector.
3. Liquidity risk
We can define liquidity as how easily an asset can be converted into cash. Liquidity risk appears when a company is forced to sell its assets below market value. It also refers to a person's or a company's ability to meet short-term obligations. In companies it can be measured through liquidity ratios, comparing current assets against short-term debt. A company may hold enough long-term assets or investments to cover its obligations, yet not be able to do so immediately.
4. Credit risk
Also called default risk, it refers to the counterparty's inability to meet its obligations after being lent money. Banks are among the most exposed to it, which is why, to minimize it, lenders run studies to verify the liquidity and solvency of the party requesting credit.
5. Legislative risk
This risk goes hand in hand with government, which can create, modify, or eliminate laws that affect the operation you invested in. One way to reduce it is to invest in stable countries with established laws rather than in rules still pending approval; that is how you protect your capital.
6. Interest rate risk
This is considered a systemic risk because it is tied to changes in market interest rates. Although it can affect all kinds of assets, fixed-income investments such as government bonds are the most exposed.
7. Inflation risk
This risk depends on the economy. If the inflation rate rises, so does the chance that it outpaces the return on your investment. It can erode the purchasing power of the company or person carrying out the operation and leave the real return below what was expected.
In conclusion
There are different levels and types of risk when investing. Recent history reminds us that the perfect investment does not exist, and that we must evaluate and anticipate a range of factors and scenarios before making decisions about our wealth. In a world of possibility and chaos we have to stay cautious, understanding that every money decision we make carries an impact at the personal, business, and estate level.
The best way to prevent or reduce losses is to master risk management, and that first requires knowing your risks. So I invite you to identify and analyze the risks of every financial decision you make, from lending money to an acquaintance to buying into a rental pool. If everything carries risk, then the key is learning to measure and manage it.
At Buying America, that discipline is exactly what we bring to investors looking to allocate capital in the United States: helping you weigh each level and type of risk before you commit, so your decisions rest on process, not luck. What do you do to manage your risk before you invest?