You hear it every day: “The market is going haywire. Investing is risky. I am not going to put my money in that big casino.”

But what is risk when it comes to the stock market?

Is it short-term market fluctuations? Some bad macro-economic event? Reading that Steve Jobs bit the big apple? Before we can even consider managing, let alone avoiding risk, we need a clear understanding of what risk truly is. Here are some considerations:

Risk Comes from Not Knowing What You Are Doing.

To me this is the best definition of risk. Is a scalpel risky? In the hands of a toddler, yes. In the palm of an experienced surgeon, it is a potential life-saver. Risk is rarely an absolute; it is almost never the same for everyone given individuals’ different intellectual competencies, physical abilities, and so on. When it comes to investing, people take risks every day that relate quite simply to their not knowing what they are doing and not being adequately informed. Thus, it is not surprising that the average investor’s returns over the last 20-30 years have been about one-third of how the market performed.

Risk Comes from Mismatching Time Frames and Investments to Achieve Investment Objectives

If I could garner only one piece of information from a new client, it would be the simple question of: When do you need the money back? One year? Ten years? Each requires a different portfolio entirely. Match your investments with your time horizon and you will greatly mitigate a source of financial risk.

Risk Comes from Too Much Leverage

The more leverage you take on, the smaller your margin for error. Take $1,000 to Vegas and if you are down 10%, you walk away with $900. Take the same $1,000, leverage it up 10X with the house’s “easy” money, drop 10% and your entire capital base is obliterated. A 20% loss at that level of leverage wipes out your capital and leaves you in hock to boot. That is the destructive power of leverage.

Risk Comes from Low Liquidity and High Position Concentration

Certain assets are inherently less liquid than others. Golf courses are harder to sell than shares of IBM. Often integrally related to the risk of lack of liquidity is the risk of concentration. If a good chunk of your portfolio is in that golf course and you need to raise cash, you have few options in what to liquidate and those on the other side of the transac­tion will use that to their advantage.

Risk Comes from Overpaying for a Good Company or Buying a Bad One

If you bought Coca-Cola in the late 1990s when it was trading at over $80 per share and selling at a P/E ratio of over 50X, you committed the crime of overpaying. But you bought a quality, dividend-paying company rather than the likes of one of the internet wannabes that are now worth $0. An investor would rather make the mistake of over­paying for a quality company than buying a bad company that might experience permanent capital loss. In the case of Coca-Cola, while you were waiting patiently for the company’s earnings to catch up to its valuation, you were getting paid an ever-increasing dividend that was being reinvested at lower and lower prices.

Risk Comes from Not Knowing Who Your Money Manager Is

If one were to ask 100 otherwise intelligent people who the person is that makes investment decisions on their behalf, most would have no clue. Imagine never getting to meet the person making important decisions for you in law or medicine. Without regular, direct contact between the client and the money manager, how can objectives be monitored and updated? Get to know the person mak­ing decisions about your financial future and reduce the risk associated with the lack of a relationship between client and money manager.Equity markets will always have periods of volatility. Construct your portfolio properly and understand where true risks lie, and these extreme market movements can be your friend.