MEPX
Chapter 9 of 12All chapters
  1. 1What a share is
  2. 2Exchanges and brokers
  3. 3How a price is set
  4. 4Order types
  5. 5What it costs
  6. 6Reading a company
  7. 7Dividends and returns
  8. 8Indexes and funds
  9. 9Risk and diversification
  10. 10Market cycles
  11. 11Psychology and mistakes
  12. 12Learning further

Chapter 9 of 12

Risk and diversification

What can go wrong, and what helps.

Two kinds of risk

Specific risk belongs to one company: a fire, a fraud, a lost contract. Market risk hits everything at once. Diversification removes much of the first and none of the second.

  • Twenty holdings across different industries removes most specific risk.
  • Holding twenty companies in one industry does not.

Time and volatility

Prices move far more than the underlying businesses do. The main defence is a horizon long enough that you are never forced to sell during a fall.