Systematic & Non-systematic Risk
While you can't eliminate risk, there are strategies to help manage it. Learn how asset allocation may help mitigate systematic risk and diversification may help mitigate non-systematic risk.
The various risks you take as an investor can be broadly categorized as either systematic or non-systematic.
Systematic risk, or market risk, is characteristic of the entire market or a particular market segment. Because the market is inherently unpredictable, systematic risk always exists. There is always the chance that the entire market, or a particular market segment, will experience an economic downturn.
A strategic use of asset allocation can help limit systematic risk. Allocating percentages of your portfolio to different asset classes, and others, can help counter the negative effects of a decline in one asset class and let you take advantage of gains in the other. However, this won’t prevent losses in a downward market.
While asset allocation helps mitigate systematic risk, diversification can help alleviate non-systematic risk.
Non-systematic risk is based on unpredictable factors, like poor management decisions within a company or the introduction of competitive products. Because non-systematic risk is based on the performance of an individual company or groups of companies, diversifying your portfolio by investing in a variety of companies within each asset class can help counteract non-systematic risk. If you invest in more than one company, your portfolio will be better protected against the adverse effects of one single company's failure.