Top 10 Investment Risk Management Strategies to Use in 2025

From U.S. Treasury bonds to Bitcoin, every investment carries some degree of risk. However, playing it safe can be even costlier. If you don’t invest your money wisely, you miss out on the potential for compound interest and lose substantial purchasing power to inflation.

According to the legendary economist Benjamin Graham, “The essence of investment management is the management of risks, not the management of returns.” Thus, if you want to build long-term wealth, you simply need to learn how to manage risk strategically.

So, how does investment risk management work? And what risk management strategies are most effective in 2025?

Below, we’ll break down the fundamentals of risk management, the difference between risk tolerance and risk capacity, and the major types of investment risk to watch out for in 2025. We’ll also outline ten tried-and-true strategies to help you manage investment risk like a pro.

What Is Risk Management in Investing?

Risk management is the process of identifying, assessing, and mitigating potential threats to an investor’s portfolio. It acknowledges that risk can’t be eliminated entirely, but it can be managed in a way that supports an investor’s financial goals and personal circumstances.

You can think of risk management as the seatbelt of investing. It doesn’t prevent bumps in the road, such as market volatility or sudden downturns, but it can reduce these events’ impact on a portfolio’s health and longevity.

Effective risk management also recognizes the need to balance two priorities: preserving wealth and facilitating growth. As such, risk management tactics should help investors weather turbulent times without compromising their ability to seize growth opportunities as they arise.

Risk Tolerance vs. Risk Capacity

When an investor enlists the support of a financial advisor, the advisor will assess their risk tolerance and risk capacity before creating a financial plan. Here’s a brief overview of these two concepts:

• Risk tolerance refers to an investor’s psychological comfort with investment volatility and potential losses. It reflects how comfortable they are with uncertainty and whether they’re more likely to panic-sell during downturns or stay the course when markets fluctuate. Behavioral finance research shows that investors typically feel losses twice as strongly as gains, highlighting how powerful emotions can be in shaping investment decisions.
• Risk capacity is more objective than risk tolerance. It evaluates an investor’s financial ability to withstand losses based on their income, assets, liabilities, and time horizon. For example, someone approaching retirement typically has less capacity to endure a prolonged downturn than a younger investor who still has decades of earning potential to support them as they recover from short-term losses.

If you want to assess your risk tolerance and capacity, an investment risk calculator can provide a personalized analysis based on your financial profile and investment goals.

8 Types of Investment Risks Investors Face in 2025

Novice investors often assume the main risk in investing is losing money in the stock market. However, the underlying sources of investment risk are much more diverse and nuanced than that.

Here are eight types of risk investors should be aware of in 2025:

1. Market risk – Market risk is the possibility that a portfolio will lose value because of broad market movements.
2. Inflation risk – Inflation risk is the concern that rising cost of goods and services will outpace your investment returns, effectively reducing the purchasing power of your money over time.
3. Interest rate risk – Interest rate risk refers to the inverse relationship between bond prices and interest rates.
4. Credit/default risk – Credit or default risk is the possibility that a bond issuer won’t make its interest or principal payments on time, potentially resulting in losses for the investor.
5. Liquidity risk – Liquidity risk arises when an investment is difficult to sell quickly or at a fair price. It’s particularly prevalent in private markets and alternative assets.
6. Concentration risk – Concentration risk occurs when a portfolio is overly dependent on a single stock, sector, or theme. For example, a portfolio with heavy exposure to large-cap technology companies may face outsized losses if that sector experiences a downturn.
7. Longevity risk –  Longevity risk is the possibility that a retiree may outlive their savings. Without adequate retirement income planning, this can lead to reduced cash flow and long-term financial insecurity.
8. Sequence of returns risk – This risk arises when the timing of investment returns hurts an investor’s portfolio. For example, a retiree who withdraws income during a market downturn may lock in losses that undermine their portfolio’s long-term sustainability.

10 Savvy Investment Risk Management Strategies

Now that you understand the most common investment risks, you may be wondering how to mitigate them. Here are ten effective strategies to protect your portfolio from risk without sacrificing growth:

#1 Diversification

Diversification is arguably the most important risk management strategy to employ. It involves spreading investments across multiple asset classes and geographic regions.

By allocating funds to stocks, bonds, and alternatives, investors can reduce their exposure to any single market event. Investing in assets from various regions can also help mitigate the effects of geopolitical shocks, currency fluctuations, and economic cycles.

In 2025, geographic diversification is more crucial than ever, given the outsized influence of a few mega-cap tech stocks on U.S. equity returns. Expanding into international investments can help reduce overexposure to this narrow segment of the market.

#2 Strategic Asset Allocation

While diversification spreads money across different asset classes, asset allocation determines how much of an investor’s portfolio should be allocated to each one. The optimal proportion depends on an investor’s:

• Goals – Whether their priority is long-term growth, steady income, or capital preservation, investors’ financial objectives should shape how aggressively or conservatively they structure their portfolio.
• Risk profile – An investor’s risk tolerance and capacity influence how much volatility they can absorb without compromising their financial plan.
• Time horizon – The length of time until an investor needs their funds is another key factor in determining asset allocation. Investors with long time horizons can generally afford greater equity exposure.

As an investor’s goals and time horizon shift, they should adjust their asset allocation to ensure their portfolio remains aligned with their changing needs.

#3 Portfolio Rebalancing

Even if an investor’s goals remain the same, market shifts can cause allocations to drift away from their original targets, introducing unintended risks. For example, let’s say an investor initially allocates 80% of their portfolio to stocks. After a strong equity rally, their stock allocation jumps to nearly 90% of their total portfolio, exposing them to more risk than they originally intended.

Rebalancing is the process of realigning a portfolio with its target allocations, ensuring investors maintain their desired level of risk despite market fluctuations.

Read More: What is a TAMP and Should You Use One?

#4 Dollar-Cost Averaging

Dollar-cost averaging (DCA) is the strategy of investing a fixed amount into a specific asset on a consistent schedule, regardless of market conditions. This approach helps investors avoid the temptation to try to time the market.

DCA is particularly valuable in volatile markets, as it helps investors remain disciplined, avoid emotional decision-making, and steadily build positions without overexposing themselves at market peaks.

#5 Stop-Loss & Limit Orders

Stop-loss and limit orders are automated trading tools that help investors manage downside risk and maintain control over their entry and exit points. Here’s how they work:

• As the name suggests, stop-loss orders are designed to limit losses. They automatically trigger a sale when a security’s price falls to a specified level, helping investors prevent minor setbacks from turning into major losses.
• Limit orders set the minimum price an investor is willing to accept when selling or the maximum price they’re willing to pay when buying. This ensures they only execute trades within a predefined price range.

While not fool-proof, stop-loss and limit orders remain valuable tools in 2025’s volatile environment, especially for investors with concentrated holdings.

#6 Safe-Haven Assets

Safe-haven assets are investments that generally retain or increase their value during periods of market stress. They can provide much-needed stability when riskier assets are under pressure.

Some examples of safe-haven assets include:

• U.S. Treasuries – Backed by the U.S. government, Treasury bills, notes, and bonds can be considered some of the safest fixed-income investments. Treasuries’ predictable returns make them a reliable refuge when markets become volatile.
• Gold – Gold has historically served as a hedge against inflation, currency devaluations, and geopolitical turmoil, thanks to its intrinsic value and limited supply.
• Cash equivalents – From money market funds to short-term certificates of deposit (CDs), cash equivalents offer quick liquidity and minimal volatility, giving investors the flexibility they need to cover their expenses and reinvest quickly when opportunities arise.

Adding modest allocations of these safe-haven assets to a portfolio can provide valuable stability during turbulent times.

#7 Hedging with Options, Futures, or Derivatives

Sophisticated investors often hedge their investments to offset potential losses. Hedging involves using certain financial instruments to reduce the impact of adverse price movements in other assets.

Some common hedging strategies include:

• Purchasing put options – Put options grant investors the right to sell an asset at a set price, protecting them against sharp declines in that asset’s market value.
• Leveraging futures contracts – Futures contracts lock in prices for commodities, currencies, or securities, helping investors secure more predictable costs and returns.
• Employing currency hedges – Currency hedging reduces the risk of exchange rate fluctuations, protecting investors’ returns from sudden currency shifts when investing internationally.

While hedging isn’t right for every investor, it can add an extra layer of protection to a well-structured risk management plan.

#8 Insurance and Annuity Products

Insurance and annuity products play a vital role in managing financial risks and safeguarding against life’s unexpected events. Here are a few common solutions:

• Life insurance ensures that an investor’s dependents or business partners receive financial support in the event of their premature death.
• Long-term care insurance helps cover the rising costs of assisted living, nursing homes, or in-home care, protecting investors’ retirement savings from exorbitant healthcare expenses.
• Annuities provide a guaranteed stream of income in retirement, helping investors safeguard against longevity risk and untimely market downturns.

#9 Alternative Assets

Alternative assets can offer a degree of diversification that goes beyond a basic mix of stocks and bonds. These assets include:

• Private equity, which involves investing in privately held companies and offers the potential for high returns. However, it’s often riskier and requires longer holding periods than traditional investments.
• Private credit, where investors lend directly to businesses seeking flexible financing solutions. These loans can offer attractive yields and enhanced diversification.
• Real estate, including direct property ownership and investments into real estate funds, which can generate income and appreciate in value over time.
• Hedge funds, which are actively managed investment funds that employ sophisticated strategies, such as long/short positions, arbitrage, and leverage, to generate returns regardless of market trends.
• Digital assets, such as cryptocurrencies or blockchain-based investments, which offer impressive growth potential, along with significant volatility and regulatory uncertainty.
• Infrastructure investments, which fund transportation, energy, utilities, and other essential public systems and often generate reliable cash flows.

Since these assets’ performance tends to be less correlated with traditional public markets, they may help improve investors’ risk-adjusted returns. However, their complex risks often require the oversight of an experienced financial advisor.

Read More: How to Use Different Management Styles to Enhance Your Clients’ Returns

#10 Professional Guidance From a Financial Advisor

While many risk management strategies can be implemented independently, investors often overlook key details or fall prey to their emotions amid unstable markets. That’s where a financial advisor’s guidance can make all the difference.

Professional advisors bring objectivity and discipline to the investment process, helping clients make rational decisions even when emotions run high. Thanks to their extensive experience, they can also reassure clients during periods of uncertainty, reducing their temptation to make rash decisions that derail their financial plans.

Financial advisors also have access to advanced tech solutions, which can simulate potential market scenarios and identify hidden vulnerabilities. These tools can help advisors build more robust portfolios than investors could create on their own.

Alden Investment Group: Manage Your Investment Risk With Precision

At Alden Investment Group, we believe effective risk management is the key to building lasting wealth. That’s why we equip advisors who join our Registered Investment Advisor (RIA) firm with industry-leading tools, including:

• Automated rebalancing within our advanced financial advisor platform, Alden COVE, which helps advisors ensure their clients’ portfolios stay aligned with their target risk levels at all times.
• Integrated risk assessments that advisors can use to measure their clients’ risk tolerance and capacity, automatically archiving results for compliance.
• Portfolio stress testing that employs sophisticated scenario analysis to evaluate how clients’ portfolios might perform under inflation spikes, interest rate hikes, or recessions.
• Access to our investment committee, which rigorously evaluates investment strategies, conducts thorough due diligence, and monitors market conditions, enabling our advisors to bring institutional-grade oversight to every client portfolio.
• Access to alternative investments, which we thoughtfully integrate into client portfolios using our extensive private equity, hedge fund, and real estate expertise.
• Succession planning support to ensure our advisors’ clients experience continuity, stability, and confidence during major career transitions.

Whether you’re an investor seeking professional guidance or an advisor interested in joining our RIA, contact our team today! We would love to discuss our risk management services with you and explain how they can help you confidently manage risk in today’s evolving landscape.

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Investopedia. Dollar-Cost Averaging (DCA): What It Is, How It Works, and Example.
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Investor.gov. Treasury Securities.
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