What Is Market Risk?

By Chris Duderstadt

June 12, 2024

What Is Market Risk?

Key Points – What Is Market Risk?

  • Systematic vs. Unsystematic Risk
  • Types of Market Risk
  • Causes of Market Risk
  • Managing Market Risk
  • 5-Minute Read | 23-Minute Watch

What Is Market Risk?

There are two primary categories when it comes to investment risk: market risk and specific risk. Market risk alludes to the uncertainty and possibility of losses that comes with an investor’s decisions that are related to factors that impact overall market performance.

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Systematic Risk vs. Unsystematic Risk

Market risk is also commonly referred to as systematic risk.1 While market risk can’t be terminated by having proper diversification, there are ways to combat it. Contrary to market risk, there’s specific risk—also known as unsystematic risk.2 Specific risk focuses on a certain company or market sector rather than the market as a whole.

In this article, we’re going to review types of market risk, what causes market risk, and how to manage it.

Types of Market Risk

Interest Rate Risk

Interest rate risk has been a market risk that has been top of mind for a couple of years now. It probably didn’t feel like much of a risk when the Fed funds rate range was 0%-0.25% for two years after the onset of the COVID-19 pandemic.3 After a series of rate hikes from March 2022 to August 2023, the Fed funds rate range increased to 5.25%-5.5%. And with the Fed’s higher-for-longer approach, the Fed funds rate has remained there since.

As we wait to see when the Fed will begin lower rates, it’s important to remember that the Federal Reserve’s core monetary policies are to protect the value of the dollar, keep employment in check, and keep inflation in check.

We’ve also seen how there is an inverse relationship between interest rates and bond prices. When interest rates rise, bond prices tend to fall. And vice versa. Keep that in mind when it comes to interest rates and market risk. Could there be some opportunities within the bond market? AllianceBernstein’s David Mitchell believes there could be—specifically in municipal bonds—and shared his reasoning with Dean Barber on The Guided Retirement Show.

Equity Risk

The next type of market risk we want to cover is equity risk, which is the possibility of loss because of fluctuations in stock prices. Whereas government bonds are typically considered as “risk-free” investments,4 there is risk when investing shares in a company’s stock. For much of 2023, much of the talk involving stocks was about the Magnificent Seven stocks: Microsoft, Apple, Nvidia, Amazon, Tesla, Meta, and Google. While they only accounted for seven of the 500 stocks in the S&P 500, there were occasions in 2023 where they made up more than 25% of the index’s return.

Growth vs. Value

The Magnificent Seven are examples of growth stocks. In the fourth quarter of 2023, the average price-to-earnings ratio of the Magnificent Seven was over 50.5 That’s why LSA Portfolio Analytics President and Founder Brad Kasper posed on The Guided Retirement Show if 2024 was going to be a strong year for value stocks. You’re going to pay a lot more for the Magnificent Seven stocks than some of the value stocks that have PE ratios in or near the single digits. That needs to be considered when thinking about market risk.

Currency Risk

Let’s shift gears now to currency risk—also known as exchange-rate risk. Currency risk occurs when the price of one currency changes in comparison to another. It’s the chance of losing money because of a disadvantageous change in exchange rates. Businesses of individual investors who trade with foreign assets subject themselves to currency risk.

Commodity Risk

Lastly, we want to touch on commodity risk. It’s the possibility of loss due to fluctuations in commodity prices, such as gold, silver, oil, etc. If you’re thinking about purchasing a commodity, the chance of the commodity’s price increasing is a risk you’re taking. The inverse of commodity risk takes place when someone is thinking about selling a commodity and its price decreases.

Other Causes of Market Risk

We’ve mentioned some causes of market risk while covering the different types of market risk. Market risk oftentimes hinges on economic factors (i.e., inflation and unemployment), policy change (domestically and internationally), natural disasters, and market sentiment.

Managing Market Risk

Understanding the types and causes of market risk is one thing, but how do you manage it? First, it’s critical to have diversification among your investments. Again, having a diversified portfolio won’t nullify your chances of being subject to market risk, but it can be an impactful strategy to protect you from it.

Like we explained with the S&P 500 in 2023, the technology sector was primarily driving the market’s returns for much of the year. But that doesn’t mean that going all in on the Magnificent Seven stocks was the way to go. Just think back to what happened with the Dot-Com Bubble.

Stress Testing Against Market Risk

Have you wondered if you’ll be OK if you have to deal with a prolonged market downturn or high-interest rate/high inflationary environment in retirement? Each type of market risk that we covered is a legitimate concern that needs to be planned for. So, what we do for our clients is go back to periods such as the Dot-Com Bubble, Great Recession, and other extended stretches of economic turmoil. Could you have retired during those periods and not run out of money?

With our financial planning tool, we can stress test your financial plan against various economic cycles and show you what your probability of success is to get to and through retirement without having to adjust your spending. As you’re going through the retirement planning process, we have another resource that can help you gauge your retirement readiness in our Retirement Plan Checklist. It consists of 30 yes-or-no questions—some of which pertain to market risk. This white paper also includes age-and date-based timelines that review several key retirement planning considerations. Download your copy below!

Retirement Plan Checklist

Having a Personalized Financial Plan

What should I invest in is another question that our advisors are frequently asked when meeting with prospective clients. The thing is that we can’t answer that without first knowing what your goals are and your risk tolerance. Your portfolio’s asset allocation (mix of equities and fixed income) might look a lot different than your friend or family member’s. That’s because your goals (financial and non-financial) are unique to you.

It’s critical to have a goals-based financial plan that considers your investments, taxes, estate planning needs, and risk management needs. We’re ready to help you build a personalized plan that’s designed to give you more confidence that you’re doing the right things with your money, freedom from financial stress, and time to spend doing the things you love.

Do You Have Any Questions About Market Risk?

Market risk can quickly turn into a source of financial stress. We want to make sure you have a plan in place that will help you feel confident about your investment decisions. Start a conversation with our team today so we can help you combat market risk and have more confidence, freedom, and time.

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Don’t let all the headlines about various types of market risks lead you to making emotionally-charged financial decisions. Our financial planning team puts your needs, wants, and wishes first when building your personalized financial plan so you can make informed decisions regarding your financial future.

What Is Market Risk? : Watch Guide 

00:00 – Introduction
– What Market Risk Neal Sees on the Horizon
– Types of Risk
– Personal Return Index
– Bond Market
– Fear of Missing Out
– What Happens When We Have a Recession

Resources Mentioned in This Article

Articles and Videos

Past Episodes of America’s Wealth Management Show


Retirement Plan Checklist

Other Sources






Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.