Risk of ruin is the potential for an individual or organization to lose all of their capital. This term is typically applied to investment and business risks. Risk of ruin is often extended to include the loss of capital that makes it almost impossible to return to previous levels. For example, loss of 99% of your capital would typically be considered ruin. The following are key factors in managing risk of ruin.
Investment RiskThe risk associated with individual investments such as stocks, real estate, bonds, currency and gold.
LeverageGenerally speaking, borrowing money to invest greatly increases your risk of ruin. For example, someone who is leveraged 2x only needs a 50% loss to be ruined.
Investment ConcentrationInvesting most of your capital in a particular type of security or asset. Includes seemingly diverse assets that could be impacted by the same risk trigger.
Zero-sum GameGenerally speaking, an investor playing a game that is stacked against them in some way will lose all their funds after enough bets. For example, a zero-sum game with transaction fees typically results in ruin if you trade actively enough.
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