Market risk. Market risk comes with exposure to a particular asset class or sector, such as U.S. equities or technology stocks. It's the threat of the entire market losing money. That can happen if investors think that the U.S. stock market is selling well above its prospects, for example, or that technology stocks as a group are going to face slower growth.

To limit market risk, diversify into various markets and sectors. By doing so, you're reducing your portfolio's dependence on a single market.

Company-specific risks. Operating risk and price risk are two factors contributing to short-term volatility of individual stocks.

Operating risk is the risk to the company as a business and includes anything that might adversely affect the firm's profitability. Price risk, meanwhile, has more to do with the company's stock than with its business: How expensive is the stock compared with the company's earnings, cash flow, or sales?

To limit company-specific risk, own a collection of stocks rather than just a few.

Economic risk. Inflation. Interest rates. Economic growth. Changes in these economic factors--or even rumors of changes in these economic factors--can lead to short-term volatility.

To limit economic risk, buy securities that do well in different economic scenarios. Bonds and high-yielding securities (such as utilities stocks and real-estate investment trusts), for example, generally perform poorly when interest rates rise; balance those investments with low- or no-yielding choices.

Country risk. Whether you invest only in U.S. stocks or put some dollars outside the U.S. market, you're exposing your portfolio to the risks of investing in that country. There's political risk, or the risk that the current leadership will change for the worse. Then there's the risk that the currency will lose its strength versus other currencies.

To limit country risk, do one of two things. If you own both U.S. and foreign securities, invest in a variety of markets, not just a few. If you invest strictly in U.S. securities, be sure your investments aren't overly reliant on just one part of the world for their success. For example, make sure some of your companies have expanded internationally. They'll probably be more resilient than less-diverse companies when the U.S. economy slows.

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