There are two major categories of investment risk. Systematic risk (also referred to as Market risk) and Unsystematic Risk (also known as Specific risk). Let’s discuss how these are different and how they might affect your portfolio.
Systematic risk affects the performance of the entire market simultaneously. Because it affects the whole market, it is too difficult to eliminate through diversification.
An example would be interest rate risk, which his a form of systematic risk, and arises due to changes in market interest rates. You nor I can control rather or not the Fed decides to raise interests rates, making it an unmanageable risk.
Other examples include inflation, fluctuations in currency, natural disasters and recessions.
Unsystematic risk is the inherent risk of investing in a specific “company” or “Industry”, because if that company was to file for bankruptcy, you would lose your entire investment.
Avoiding this risk is simply done by investing in a range of similar companies, making it improbable to lose your investment in the event one or two filed insolvent.
Other examples are bad entrepreneurship, political and legal risk, and operation risk. The key here is that you can protect yourself through investment diversification.
To sum it up, systematic and unsystematic risk can be partially mitigated with risk management solutions such as asset allocation, diversification, and valuation timing. Working with an advisor, a manager can increase portfolio returns and/or reduce risk to optimize an investment portfolio.