What is risk of ruin?

The probability of an investor losing all his or her investment capital without the chance of recovery. It's calculated using the probability of making a return on investment (ROI) with that of making a loss and the proportion of an investor's capital that's at stake.

Where have you heard about risk of ruin?

It's a relatively well known and self-explanatory concept. Anyone who has played Monopoly knows it. As the game moves on, the board fills with houses and hotels, increasing the risk of in-game financial ruin.

What you need to know about risk of ruin.

Risk of ruin often results in bankruptcy, though not necessarily. It's more intended as a signpost marking the "point of no return" for traders and investors.

There are two main strategies for reducing the risk of ruin:

• Diversification - where an investor tries to own a wide range of assets, e.g. bonds, property, shares and liquid assets
• Hedging - constructed from any number of financial instruments

It's also a term sometimes used by financial traders for when a trading account balance drops below the minimum requirements to continue trading.