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This is commonly known as the risk of keeping all your eggs in one basket. If all your assets are in one kind of investment, like stocks or CDs, you are not protected if that asset falls sharply in value. Even more dangerous is to keep most of your money in just one stock, bond, or CD because if something happens to it, you have no alternate assets to fall back on.

Many people’s biggest financial mistake is to have too much of their net worth tied up in their own company’s stock. Even if it is a wonderful company that has a bright future, these people lack diversification. The way to lower risk in this realm is to spread your holdings among different kinds of assets as well as among several individual investments within each kind of asset. One easy way to diversify is to buy a mutual fund, which itself holds dozens of stocks or bonds.

Even if prices are rising at about 5 percent a year, the value of your dollars is steadily eroding over time. If inflation is galloping at more than 10 percent, your purchasing power disappears much faster. Sometimes you don’t notice
inflation risk until you must buy something you have not bought for several
years and you are hit with sticker shock when you see how much prices have risen.That can be true when you buy a new car or when you make your child’s first tuition payment. You might mutter to yourself: “Why, when I went to college, it cost me $5,000 for all four years, and now that covers only the first semester of freshman year!”Welcome to inflation risk.