Risk Parity

Finance Allah shmoop what is market risk All right There

are a lot of risks when you invest money Two

of the most common categories are unsystematic risk And yes

of course systematic risk Also known as market risk Well

unsystematic risk refers to risks linked to a specific stock

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

traded ice cream company and the company goes bankrupt Who

knew pork rind ice cream would prove so unpopular Who

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

and you paid for it by losing everything you invested

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

risk AII bad brain bad return What not all investments

do well In fact many of them do poorly even

for the best of investors So most professionals diversify their

eggs such that not all of them are invested in

one stock or one basket So that revolves around unsystematic

risk That is risk You can actually do something about

and improve your odds of being successful like by being

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

just exists as a natural part of the risk world

For illustrative purposes You could choose to not take any

road risk Like when you drive on the roads Your

odds of being hit by some idiot texting his girlfriend

and not looking at the double yellow line are not

one in a good Gillian right You also have a

risk of a tire blowout or a tree falling on

you or skidding into a mailbox on that hill with

the gravel in the oil slick from the construction people

right Those are all quote market risks unquote of driving

So why do it Why drive Why not just stay

home Never leave the house get Amazon and door dash

and ups to take care of all of your needs

and never suffer the market risk of dying on the

road Well for some people this probably is a good

idea Well the same allegory lives in the stock market

When you invest in stocks odds are extremely high that

at some period while their value will go down maybe

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

attacks and natural disasters political upheaval and zombie apocalypses or

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

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

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

to deal with market risk other than for one thing

time Historically the stock market goes up over time Check

out this glorious chart running for one hundred years in

change for what the market is done without even calculating

the additional return from dividends distributed along the way Well

you can see that there has rarely been an extended

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

or at least distribute enough in dividends Such that in

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

being invested in the stock market could this suddenly change

and go the other direction such that we have half

a century of no growth Sure but that would be

a big departure from the way our driving has gone

in the past on the roads But you never know

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

and driving and you know really not giving a