systematic risk
Systematic risk is the danger that hits every investment at once, like fuel price rises or a naira devaluation, no matter how well you spread your money.
In plain English
When fuel price goes up in Nigeria, transport fare goes up, garri goes up, everything goes up together, and there is no shop you can run to that will not feel it. That is systematic risk in real life, the kind of trouble that does not ask for your address before it visits your whole street.
In investing, systematic risk is the risk that touches the entire market at once, more than one company or one sector. A naira devaluation, a spike in interest rates by the Central Bank, a global oil price crash, an election that spooks investors, these things shake banks, manufacturers, tech firms and everybody else on the Nigerian Exchange the same afternoon.
This is different from the risk that a single company has bad management or a factory that keeps breaking down, which you can escape by simply not buying that one stock. Systematic risk follows you into every stock, every bond and often every fund, because it is baked into the market itself, not into one company's books.
Someone in London holding shares in a FTSE index fund still feels it when the Bank of England raises interest rates sharply, because borrowing gets costlier for every company in that index at the same time. A Nigerian in Toronto sending money home also feels a version of it, because a naira slide changes what every single one of those pounds or dollars can buy back home, regardless of which Nigerian asset the money eventually lands in.
You cannot spread your way out of systematic risk by buying more stocks, because it lives above the level of individual companies. What investors do instead is spread across asset types, currencies and countries, hold some cash, and simply accept that a bit of shaking is the price of being in any market at all.
Say you hold ₦2,000,000 spread across ten different stocks on the Nigerian Exchange, thinking you are safe because your eggs are in different baskets. Then the Central Bank raises interest rates sharply to fight inflation, and nearly every stock on the exchange drops in the same week, because borrowing costs rise for all of them and investors pull money out of shares generally. Your ten baskets all took a hit on the same day, because the wind that shook them came from above the baskets themselves.
Questions people ask
Can I ever fully avoid systematic risk?
Not completely, no. You can soften it by holding different types of assets, different currencies and some cash, but as long as you are invested in a market at all, you carry some of its shared weather with you.
How is systematic risk different from the risk of one company failing?
The risk that one company fails, called unsystematic risk, can be reduced by spreading your money across many companies. Systematic risk affects the whole market or economy at once, so spreading across companies alone will not protect you from it.
Does systematic risk affect bonds as much as stocks?
It affects both, though sometimes differently. A sharp rise in interest rates, for instance, tends to push bond prices down and can also unsettle the stock market, so the same event can shake both sides of your portfolio at once.
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