By Indexopedia Research Team | February 19, 2025 | In
Investing carries a variety of risks, which can broadly be categorized as systematic risks and unsystematic risks. Systematic risks affect the entire market and are unavoidable, while unsystematic risks are specific to particular investments and can often be mitigated through diversification. Understanding these risks is key to building a resilient portfolio. Systematic Risks (Market-Wide Risks) Systematic risks, also referred to as market risks, impact the entire financial system and are beyond the control of individual investors. These risks cannot be eliminated through diversification but can be managed through careful asset allocation. Key types of systematic risks include: Market Risk: The risk of overall market declines due to economic events, changes in investor sentiment, or geopolitical instability. For instance, a recession or global financial crisis can cause widespread market losses. However, history has shown that over the long-term markets recover. For instance, if you invested $1,000 in the S&P 500 at the end of 1977 and reinvested your dividends, by the end of 2024 you’d have over $216,000! That’s despite the impacts of many recessions and the great financial crisis. Take a look at the chart