Hey it’s Sasha Evdakov and thanks for joining me on this week’s lesson. Now, this week what I’d like to cover is the two main risks in the market and they are Systemic risk and Unsystemic risk. Now sometimes some people call them Systematic risk or Unsystematic risk but for me I use the term Systemic and Unsystemic risk.
Understanding Systemic and Unsystemic
These are the two main risks in the market and you can of course use these two main risks and apply them to regular investments as well so you can take these risks, Systemic and Unsystemic and also apply them to your just general day-to-day life in terms of risk.
When we look at the foundational concepts of these two different types of risks, the whole point of knowing and understanding what they are isn’t really just to see how you’re positioned in the stock market and what risks and exposures that you have.
Systemic risk and basically the easy way to remember, is something that affects the system as a whole. If you think about the stock market if you have systemic risk like war breaks out this affects the whole system of the stock market or it affects everything encompassing your investment so that is Systemic risk.
Now, Unsystemic risk or Unsystematic risk, if you prefer that way of phrasing it, is really things that affect individual stocks or stocks specific. It could also be sector specific risk in terms of just maybe the tech industry or maybe just the retail industry or something like that. It’s really just encompassing just a very small portion of the market.
To simplify things if you are diversified let’s say in your portfolio, you have a basket of five stocks and then one of those has earnings coming out that is Unsystemic risk because the other four that you have are going to somewhat protect you because they don’t have earnings, they don’t have this Unsystemic risk coming out.
On the flip side if you have something like the Wall Street Crash of 1929 then that is Systemic Risk. It’s going to affect just about every stock out there and diversification is not going to help. The same thing with the Black Monday in 1987, again that’s going to a fact a huge part of the market and even if you had a hundred different companies you are still going to be at risk because it pulled down the whole market.
Dealing with Risks
Now you might be wondering what is it that you can actually do when it comes to Unsystemic risk. Well, if it’s Unsystemic risk, like FDA approvals earnings you probably guessed it, you can get out beforehand or have a basket of stocks to diversify or if you’re looking at a global scheme of your investments you can have other investments like a real estate coins stamps whatever it is that you’re investing into. You can diversify your investments that way if you have one thing going wrong or bad, other things are going to keep you diversified and balanced out within your investments.
On the other hand if you have something like 9/11 happening where two airplanes crashed into the Twin Towers then that is something that is very tough to plan for. Of course you can get some of the safer plays and stability plays that maybe we’ll kind of help cushion the movement in case everything gets suck down or maybe get some inverse place but those are very difficult things to time unless you start seeing slowly war breaking out but usually a lot of those things that come are unexpected.
What you could do is buy some options if you see something’s coming in but it’s very tough to plan for those other types of systemic risk, instead it’s better to diversify in other areas of your life such as real estate or buying actually physical tangible assets to where the value may not get sucked down or pull down as much as you know, if everything affects the stock market.