Unsystematic risk

Risk attached to one specific holding - a company failing, a building burning, a borrower defaulting, a product being recalled. Also called specific or idiosyncratic risk.

Example

A fraud at a single company is devastating at a 50% weight and barely visible at a 2% weight; nothing about the fraud changed, only the exposure to it.

Important

This is the risk diversification genuinely removes, and it is removed silently - you never see the disasters it prevented, which is why the protection feels unnecessary until it is not there.

Related terms

• Systematic risk — Risk shared by everything in a market - the economy, interest rates, inflation, currency, broad sentiment. Also called market risk.
• Diversification — Holding enough genuinely different assets that no single outcome decides your result. It reduces risk specific to individual holdings; it does not reduce the risk they all share.
• Concentration risk — The risk that a large share of your wealth depends on a single outcome - one company, sector, property, currency, employer or counterparty.

Lessons that explain it

• Why diversification works — Spreading money across many holdings does not raise your expected return. It changes the range of outcomes around it - and in particular it removes the ones you cannot come back from. (11 min)
• The first ten holdings do most of the work; the next fifty do much less — Adding holdings reduces the damage any single failure can do, but the benefit falls away quickly. Beyond a point, more names add admin and dilute your best ideas without removing much risk. (10 min)

All 578 terms in the Investing glossary