New to investing? Starting out, most of us focus on potential gains. But what about the risks? This video dives deep into the two main types of investment risk and shows you how to develop a plan to address them.
Learn how to:
- Identify and manage systematic risk (affects the entire market) -Systematic risk, also known as market risk or undiversifiable risk, is the inherent risk affecting the entire market.
Examples of systematic risks include changes in interest rates, economic downturns, political instability, natural disasters, and systemic financial crises.
Recent Systematic Risk examples include: COVID, Russia/Ukraine Conflict, subsequent inflation shocks. Addressing these with Portfolio Exposure levels is crucial. This is why margin can be dangerous. Investors cannot eliminate systematic risk through diversification; this limitation underscores the boundaries of diversification.
- Protect yourself from idiosyncratic risk (specific to a company or industry) Idiosyncratic risk, also known as unsystematic risk or diversifiable risk, is specific to a particular company, industry, or sector. It can be mitigated or eliminated through diversification because it pertains only to a specific asset or group of assets.
Common Idiosyncratic Risks include stock offerings, management errors or fraud, supply chain disruptions, competition, analyst upgrades/downgrades, reputation, litigation, and earnings season. Planning for all these risks in establishing exposure and concentration is necessary.
- Diversify your portfolio strategically (beyond just the number of stocks)
Diversification can be achieved through number stocks in a portfolio, prices paid, or time taken to establish a position.
- Develop a position sizing strategy to limit downside exposure
- Craft a plan for earnings season volatility (and avoid nasty surprises!)
- Feeling overwhelmed by potential risks can lead to costly decisions. By understanding these risks and creating a plan, you'll be in a better position to stay calm, make smart choices, and achieve your investment goals!
Ready to take your investing to the next level?
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