I have been trading for some time but I keep hearing about systematic and unsystematic risk. I do not really understand how they differ.
I lost some money recently and I wonder if I could have avoided it by understanding these concepts better.
What is the main difference and how do they affect trading decisions?
Systematic risk affects all markets and cannot be diversified. Examples include economic downturns and interest rate changes.
Unsystematic risk impacts specific assets and can be mitigated through diversification. Examples are company earnings reports and sector news.
Unsystematic risk management is simpler than addressing systematic risk.
Systematic risk impacts the entire market, like recessions or political issues. It’s unavoidable no matter your trading choice.
Unsystematic risk relates to specific companies or sectors, such as poor earnings or scandals.
The key takeaway is you can reduce unsystematic risk through diversification, but systematic risk affects your whole portfolio.
Market crashes affect everyone and are systematic risk. Unsystematic risk is specific to one asset, like a bad earnings report. You can reduce unsystematic risk through diversification.
Last month was brutal for me. The Fed announcement wiped out my portfolio. That’s systematic risk.
Unsystematic risk is when one stock tanks due to news while others remain fine. I felt that with Apple earnings. My Apple position crashed, but my other trades were profitable.
Both types of risk are tough to deal with but require different approaches.