Systematic and Unsystematic Risk-Why Diversification Matters

Systematic risk, Wall Street lingo for market, global, or undiversifiable risk, and its sister, unsystematic risk, or company related, diversifiable risk,  have been extremely prevalent in recent weeks.

Yesterday, I mentioned the Oil Well situation currently making headlines.  British Petroleum (BP) is the company who was contracting the drilling operations from Transocean, (RIG) who provided the actual structure.

As you can imagine, investors have recently taken a cautious view of these companies. This risk is called  Unsystematic or company related risk, and is one of the basic reasons it is necessary to diversify. Every company has unsystematic risk, if nothing other than legal liability in some form or fashion. Other reminders for diversification, management changes, and foreign operations are often missed by investors, but never the less are important reasons for diversification.

Systematic risk, as mentioned before is prevalent in all types of investing and will remain rooted in an investment portfolio no matter the diversification. This risk can readily be seen when the broad capital equity markets take a fall and, in sympathy, individual investments fall accordingly.

Recent events have shown the need for careful diversification and methodical investing, whether individual equity, Mutual Fund, ETF, or Index. Be Careful out there, and take note of the systematic and unsystematic twins, especially their location in an investment portfolio.

Have a Great Day!


Comments are closed.