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FP Article 15.12 (To sign up for a FREE 16-lesson eCourse on Investment Risk, please click here.)

Investment Risk - Market Risk

by Rajen Devadason

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

Warren Buffett

  Market risk is also known as systematic risk. It is the non-diversifiable risk of every single security within that market.

The reason it cannot be eliminated through diversification (at least within that market) is the effect upon all members of the market's universe that such occurrences as rising global energy prices, an impending collision with a chunk of rock from space, or a major war might have.

Do note, however, that there is one very interesting source of confusion. 

 

 

 

 

 

 

 



This confusion does not arise between market risk and systematic risk. After all, as I've mentioned, they are one and the same thing!

The confusion arises because there also exists something known as systemic risk, which is similar to systematic risk in spelling and sound. But systemic risk refers to something much grimmer and very different - the possible collapse of an entire financial system through a widespread stock market implosion or the utter and complete collapse of a country's banking system.

This is an article explaining market risk. I hope you enjoy reading it. But if it isn't what you're looking for, you're welcome to search for something that better meets your needs. Thank you for allowing me to serve you.

Rajen Devadason

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Our focus here, however, is the more common, less cataclysmic form of risk - market or systematic risk. To better understand it, consider this maritime analogy:

When high tide comes in, it raises all ships, yachts and junks, battle cruisers and sampans alike. Unfortunately, the reverse is just as widely applicable in low tide.

Similar things sometimes occur to entire investment markets. If market sentiment is great, most of the stocks in that market will rise. If market sentiment is lacklustre, most of the stocks will tank.

The existence of market risk means it is possible that you might own a mutual fund or unit trust fund that is...

1. Wonderfully managed; and

2. Invested in the most awesome business around...

...yet, as a result of non-diversifiable market risk, you could still occasionally find your entire portfolio going through periods of contraction because the entire market falls for one short-lived reason or another.

That's the crux of market risk.

The good news is that in most nations where governments run their economies well, the negative effects of market risk tend to be brief because the natural resilience of the free market gives rise to rapid recovery.

If you'd like to continue to learn more about other types of investment risk, here's additional information for you...

15 Types of Investment Risk (OR, to sign up for a FREE 16-lesson eCourse on Investment Risk, please click here.)

1. Borrowing Risk

2. Company Risk

3. Credit Risk

4. Currency Risk

5. Diversification Risk

6. Industry Risk

7. Inflation Risk

8. Interest Rate Risk

9. Liquidity Risk

10. Lost Opportunity Risk

11. Manager's Risk

12. Market Risk

13. Market Timing Risk

14. Political Risk

15. Prepayment Risk

 

 

© Rajen Devadason

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Rajen Devadason, CEO RD WealthCreation Sdn Bhd & RD Book Projects
349, Desa Rasah, Jalan Bayan 7, 70300 Seremban, NS, Malaysia
Tel/Fax: +606 632 8955

 
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