FP Article 15.12
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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
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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.
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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
