What is a potential consequence of failing to manage investment risks effectively?

Failing to manage investment risks effectively can lead to an increased likelihood of financial losses. This consequence stems from the fact that without proper risk management, investments can be exposed to market volatility, economic downturns, and other unforeseen events that may negatively impact their value. By not implementing strategies to identify, assess, and mitigate risks, investors may find themselves in situations where significant portions of their capital are at stake.

In contrast, the other potential outcomes listed do not reflect the true nature of poor risk management. High returns are never guaranteed, especially when risks are not managed effectively. Similarly, failing to manage risks does not result in lower tax obligations for clients, as tax implications are more closely aligned with investment performance rather than risk management strategies. Additionally, a more diversified portfolio is typically a method employed to manage risk, and failing to do so would likely lead to less diversification, not more. Thus, the correct understanding of consequences indicates that effective risk management is crucial in preserving capital and minimizing losses.