What mar­ket risk is not

Finweek English Edition - - MONEY -

Do not con­fuse mar­ket risk with con­cen­tra­tion risk. Mar­ket risk is the risk of the en­tire share mar­ket de­clin­ing. It is not the same as one share per­form­ing poorl y. You do not need con­cen­tra­tion ri sk. You should not be ex­posed to con­cen­tra­tion risk un­less you can lose all or a large part of your cap­i­tal. Even large es­tab­lished global com­pa­nies have dwin­dled into in­signif­i­cance or even dis­ap­peared en­tirely. If your fi­nan­cial fu­ture de­pends on that one share for your fi­nan­cial fu­ture, rather di­ver­sify. In­vestors hardly ever de­sign con­cen­trated port­fo­lios i nten­tion­ally. You may have in­her­ited the shares. You may have re­ceived the shares as a bonus. The shares might have grown so much that it is now a dis­pro­por­tional part of your port­fo­lio. It is not easy to cor­rect th­ese po­si­tions. If you do, re­mind your­self that you are not mak­ing the de­ci­sion to get the best re­turn (that share might con­tinue to per­form very well). You are sim­ply low­er­ing your risk.

Also, do not con­fuse mar­ket risk with own­ing poor i nvestments. Small com­pa­nies are dan­ger­ous in­vest­ments if you are not an ex­pert in­vestor. Peo­ple of­ten buy them on ‘tips’. Tips may be i l l egal i f t he i nfor­ma­tion comes from an in­sider. Tips are also dan­ger­ous.

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