What Is Risk Management: Principles & Techniques

By Catherine Brock – Updated Jul 3, 2025 at 11:40 PM

Key Points

Identify potential threats to optimize investment decisions and enhance security.
Regularly evaluate and prioritize risks to focus on the most critical vulnerabilities.
Employ diverse risk control strategies such as avoidance, reduction, or transfer.

Risk management is the process of identifying, evaluating, and controlling legal, financial, and physical threats. Although the concept can be applied in many situations, it's often discussed in relation to business and investing.

Let's explore principles and techniques of risk management so you can apply them to protect your wealth and well-being.

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A blue sign reading risk ahead. — Image source: Getty Images.

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Capital

Capital is any type of asset that you can use to generate future value, including cash and tangible and intangible assets.

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While you may not need to evaluate your risk of getting a speeding ticket, there are benefits to applying risk management techniques to your insurance purchases. Identifying and evaluating potential threats to your car or home relative to your coverage, for example, will either reveal a savings opportunity or contribute to your peace of mind. The possible outcomes are:

You're carrying too much insurance. You can safely trim your coverage and save on premiums.
You're carrying the right amount of insurance. You can keep your coverage the same but continue monitoring your risk going forward.
You're not carrying enough insurance. Carrying too little car, home, or life insurance coverage could wipe you or your family out financially. You could accept this risk and do nothing or raise your limits to feel more secure in your financial position.

In short, risk management tactics may have roots in business, but they're versatile enough to apply to financial and personal matters. Use them to navigate uncertainties, protect your wealth, and improve peace of mind.

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About the Author

Catherine grew up in Southern California wearing a lot of black and trying to perfect the art of sarcasm. Prior to joining The Fool as a contract writer, Catherine was climbing the corporate ladder in marketing roles and dabbling in too many side hustles. When she's not writing, she can be found riding a horse in the country or shopping online for clothes.

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@catherinejbrock

Catherine Brock has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends Southwest Airlines. The Motley Fool has a disclosure policy.