📉 Market Risk

Understand exposure to overall market downturns and volatility.

Introduction

Market risk refers to the potential for losses due to movements in overall market prices.
It is also known as systematic risk, because it affects nearly all investments and cannot be eliminated through diversification alone.

Core Principles

  • Broad Exposure: Market risk impacts entire sectors and asset classes.
  • Volatility: Prices fluctuate due to economic cycles, interest rates, and investor sentiment.
  • Unavoidable: Even diversified portfolios are subject to market risk.

How It Works

  1. Economic Factors: Inflation, interest rates, and GDP growth drive market movements.
  2. Global Events: Geopolitical tensions, pandemics, or financial crises can trigger downturns.
  3. Investor Behavior: Herd mentality and sentiment amplify volatility.

Advantages of Understanding Market Risk

  • Helps investors prepare for downturns.
  • Encourages long‑term perspective and disciplined investing.
  • Guides allocation decisions across asset classes.

Risks

  • Portfolio Losses: Broad declines affect most investments.
  • Correlation: Assets often move together during crises.
  • Psychological Pressure: Volatility can lead to panic selling.

Famous Examples

  • 2008 Financial Crisis: Global markets collapsed due to systemic risk in housing and credit.
  • COVID‑19 Pandemic (2020): Sharp downturns across equities, commodities, and currencies.

Conclusion

Market risk is an unavoidable part of investing.
By recognizing its impact, investors can build resilient portfolios and maintain discipline during volatility.