There are two types of stock market investment risks: 1) Systematic Risk and 2) Unsystematic Risk.

Systematic Risk:

This type of risk cannot be mitigated when you invest and is considered to be the true market or volatility risk.  This is the risk that the overall market has over your stock portfolio.  The measure of your systematic risk is known as the beta.  This will compare the risk relative to the return on a benchmark index.  For example, when you are choosing a mutual fund to invest in, you may want to ask for the beta of the mutual fund.  The beta score always measures the risk of a security relative to an index.  A beta greater than one (+1) means it has a higher risk and a beta less than one (-1) means it has a lower risk than the market.

Unsystematic Risk:

This type of risk is more specific to your stock picks and therefore is based on a specific company or industry.  This risk can be overcome by diversification and should be part of your overall asset allocation selection that you choose with your advisor.  Most mutual funds have already done this for you by diversifying the portfolio to correlate the securities.  Here’s how it works:  diversification of securities can be done to offset negative returns.  If one security has a negative return projection it could then be offset by another security that will have a positive return.  This type of diversification is done using a mathematical formula also known as the correlation coefficient of each pair of securities and their returns.  Efficient portfolios are best positively correlated when you use an experienced advisor or institutional investment fund like an SMA, however many exchange traded funds (ETFs) and mutual funds (MFs) also provide good diversification to lower risk.

Christine’s Tip:

Bottomline, you want to always be mitigating risk and as you age slowly reduce the overall impact of market swings to your portfolio.  Remember, you should also want to withdraw as much as you can out of your RRIFs before you die to reduce the taxation on your estate.  Talk to your advisor, they will know what is best for your financial future.