As the Stock Market continues to go down, many individuals are wondering what is happening to their portfolio. We must understand the two different types of risk inherent in the Stock Market.
Systematic (Non-diversifiable) Risks are risks that affect all similar types of investments. One cannot eliminate these risks by diversification. Some of these risks are: 1) Purchasing power risk - inflation. 2) Market risk - securities prices tend to rise and fall in unison. Market risk is like ships floating on the sea, when the tide goes up or down all ships go with the tide. This risk is the effect on one’s portfolio from movement in the market in response to negative economic, political, or earnings information. 3) Interest rate risk - as rates go up or down the market reacts. 4) Reinvestment rate risk - reinvesting cash flows at a lower rate than was being earned. 5) Exchange rate risk – a change in the value between the US dollar and other currencies may cause an adverse investment outcome.
Unsystematic (Diversifiable) Risks are risk factors that are specific to your portfolio. One can minimize or eliminate these risks by diversification. Some of these risks are: 1) Business risk – uncertainty related to a company’s management, product line, marketing ability, and other factors specific to that company. 2) Financial risk – associated with how the company uses debt to finance its growth. 3) Default risk – can the firm meet its financial obligations?
If an investor has a well diversified portfolio in asset allocation, styles of investing, and money managers, but due to Systematic Risks see his/her portfolio losing ground, what should they do? Wait for the tide to rise.
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Sam Gott, Registered Investment Advisor
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sam@sgria.com **
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4 Dominion Drive
Building 3, Suite 250
San Antonio, TX 78257
sam@sgria.com
Ph. (210) 849–7772 • Fax (210) 881-6832