See: Risk Lover. See: Risk Seeking. See: Risk of Ruin.
You're 25. You're a lawyer. (Sorry.) You have a working career now of at lest 50 years. (Sorry.) You're committed to saving $1,000 a month, every month, "forever," no matter what. Because you have decades before you'll need that money in your retirement, you have lots of tolerance for risk, in that you really don't care what happens in the next 3-20 years, with markets swooning and diving and dancing all around. You are happy to just be long the market for a very long time. So maybe your entire portfolio is some index fund of small cap companies which pay no dividend, carry high P/E ratios, and should grow much faster than big, old, established companies. Your tolerance for volatility is big.
Now say hello to the 73-year-old you. You're starting to pull from your IRA. Your legal career has been replaced by a much better looking A.I.-driven robot. And you're...done. So you don't have the same tolerance you did before. In fact you have a fraction of it. You can't handle a down 40% market now, so you shift things around dramatically. Maybe your portfolio is only half equities or less, maybe a third, and those equities are probably old, stodgy dividend payers who don't really get crushed even in very bad markets, because their dividends so heavily cushion the fall. Maybe 1/3 is bonds, and the rest...maybe cash, or just short-term paper. Easy. No sweat. No worries. You'll have been handsomely rewarded financially for having been long the market for so long, likely with millions in savings and a long legal career you can look back on, and whimsically wish that you could have thrown a 100 mph fastball instead.
Related or Semi-related Video
Finance: What are Systematic and Unsyste...14 Views
finance a la shmoop what are systemic and unsystematic risk systemic risks are
just endemic to the market want to invest in the stock market and compound [Plate of vegetable appear]
return your way into great wealth great but then you'll suffer the normal risk
of the system that risk specifically is this yeah best of times worst of times
but up over time the market goes up you just have to embrace the notion that [Man hugging a tree]
there is systemic risk in that in the short run you can buy an S&P 500 index
fund here then lose like a third or whatever of your money in not too many
years but if you don't panic and sell just at the wrong time here right out
the storm and keep going well then you should be just fine by the time you
arrive here so that's risk that is always in the system equities rise and [Equity in the ocean]
fall like the tides or something like that but generally they rise and if you
want to swim in this bathtub well you get used to the turbulence and have an [Girl swimming against the tide]
airsick bag handy all right that systemic risk or systemic risk
what's unsystematic risk well it's bad investors or rather bad investing it's
panicking and selling your stock just when you should be doubling down its
buying lousy companies thinking that they're cheap today but not realizing [Woman runs away from smelly girl]
that they will always be cheap because they're lousy or in a lousy industry or
run by lousy management it's buying into lousy industries that also look cheap
but are dying hello paper and pulp is yeah anyone really think that's gonna be [Paper printing]
around in 20 years all right well it's believing the dreamy hopes and prayers
of future earnings and trusting that there really will be 5 million [Traffic on the highway]
driverless cars on the road in 3 years you know good luck with that we'd love
it to be true but ain't gonna be unsystematic risk is also investing in
bonds for the long-term taking very little risk when taking little risk is
the opposite of what you should be doing when you're a young investor so yeah
systematic and unsystematic risk both exist plentifully and both can bite you [Dog bites portfolio from woman]
right in the portfolio so you got to know what both are and embrace them
for what they're worth
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