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Understanding Your Risks - Part 1: Market Risk and Concentration Risk
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Market risk and concentration risk are two types of risks that investors and businesses face in the financial markets. On this week's episode of Getting Retirement Right, hosts Darrin McComas and Shon Peil dive into these two risks and how to identify and understand them in your investment portfolio.
Market risk refers to the risk that an investment will lose value due to changes in the overall market conditions or factors that affect the entire market. For example, changes in interest rates, currency exchange rates, inflation, or political instability can all impact the value of an investment. Market risk is often referred to as systematic risk because it affects the entire market and cannot be eliminated through diversification.
Concentration risk, on the other hand, refers to the risk that an investor or business faces due to holding a large proportion of their investments in a single asset or a few assets in the same sector or industry. Concentration risk can arise from a variety of factors, such as over-reliance on a single customer, supplier, or geographic region. The greater the concentration of investments, the higher the risk that any adverse event affecting those assets will have a significant impact on the overall portfolio or business.
It's important to note that market risk and concentration risk are different types of risks, but they can both affect an investor's or business's portfolio. Mitigating these risks often involves diversification, where the portfolio or business is spread across different assets or sectors to reduce the impact of any single event. It's also important to regularly monitor the portfolio or business to ensure that it remains diversified and that the risk profile is appropriate for the investor's or business's objectives and risk tolerance.
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