Finance: What is market risk?

What is market risk? Market risk refers to outside events that can move the markets into above average volatility due to fears over unquantifiable results. Market risk events can include recession, political upheaval, war, terrorist attacks, international events that can affect domestic policies, and the like.

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Transcript

00:21

or security So you buy shares in your dad's publicly

00:24

traded ice cream company and the company goes bankrupt Who

00:27

knew pork rind ice cream would prove so unpopular Who

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knew well that's unsystematic risk You made a bad investment

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and you paid for it by losing everything you invested

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un systematically Well that's individual stock risk or in systematic

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risk AII bad brain bad return What not all investments

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do well In fact many of them do poorly even

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for the best of investors So most professionals diversify their

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eggs such that not all of them are invested in

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one stock or one basket So that revolves around unsystematic

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risk That is risk You can actually do something about

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and improve your odds of being successful like by being

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a good smart investor But then there's market risk which

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just exists as a natural part of the risk world

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For illustrative purposes You could choose to not take any

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road risk Like when you drive on the roads Your

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odds of being hit by some idiot texting his girlfriend

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and not looking at the double yellow line are not

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one in a good Gillian right You also have a

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risk of a tire blowout or a tree falling on

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you or skidding into a mailbox on that hill with

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the gravel in the oil slick from the construction people

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right Those are all quote market risks unquote of driving

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So why do it Why drive Why not just stay

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home Never leave the house get Amazon and door dash

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and ups to take care of all of your needs

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and never suffer the market risk of dying on the

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road Well for some people this probably is a good

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idea Well the same allegory lives in the stock market

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When you invest in stocks odds are extremely high that

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at some period while their value will go down maybe

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a lot You can't head yourself against things like terrorist

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attacks and natural disasters political upheaval and zombie apocalypses or

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apocalypse side They say The zombie There's no real way

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to protect yourself against market risk It's just systematic It's

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part of the system Got it So there's no way

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to deal with market risk other than for one thing

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time Historically the stock market goes up over time Check

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out this glorious chart running for one hundred years in

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change for what the market is done without even calculating

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the additional return from dividends distributed along the way Well

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you can see that there has rarely been an extended

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period of time when the market didn't go up and

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or at least distribute enough in dividends Such that in

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each decade while there's been a nicely positive return from

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being invested in the stock market could this suddenly change

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and go the other direction such that we have half

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a century of no growth Sure but that would be

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a big departure from the way our driving has gone

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in the past on the roads But you never know

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There's always the N plus one idiot out there texting

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and driving and you know really not giving a