Evidence-Based Investment Insights: Managing the Market’s Risky Business

October 12, 2026

In our last piece, “The Full-Meal Deal of Diversification”, we described how effective diversification means more than just holding a large number of accounts or securities. It also calls for efficient, low-cost exposure to a variety of assets from around the globe. Now, let’s expand on the benefits of diversification, beginning with its ability to help you better manage investment risks.

There Is Risk, And Then There Is Risk

Before we even have words to describe it, most of us learn about risk as toddlers, when we tumble into the coffee table or reach for that hissing cat’s tail. We learn where risks are found, how to avoid them when possible, and which ones may be worth taking anyway.

To understand and manage investment risks, it helps to know there are two broad types:

Diversifiable, or nonsystematic, risks
Non-diversifiable, or systematic, market risks

Avoidable Concentrated Risks

Concentrated, or nonsystematic, risks are the ones that affect particular stocks, bonds or sectors. Even in a bull market, one company can experience an industrial accident, causing its stock to plummet. A municipality can default on a bond even when the wider economy is thriving. A natural disaster can strike an industry or region while the rest of the world thrives.

These risks can often be reduced through broad diversification. Bad luck still happens, but by diversifying your holdings widely and globally, the impact of problems affecting any one company, security, sector or region can potentially be reduced because your portfolio is not dependent on a single outcome.

Unavoidable Investment Risks

Systematic investment risks are the kind that affect large swaths of the market. If concentrated risks are like bolts of lightning, systematic risks are like downpours, in which everyone gets wet.

Put another way, systematic investment risks are among the risks you accept by participating in capital markets. Holding cash instead avoids many market price fluctuations, but it introduces other considerations, including the potential loss of purchasing power from inflation. Investing in capital markets means accepting some degree of market risk.

Risks and Expected Rewards

Hearkening back to our past conversations on group intelligence, markets distinguish between risks that can be diversified away and those that cannot. This distinction helps inform how investors can approach risk within their own portfolios.

Managing Concentrated Risks

Concentrating heavily in particular stocks or sectors exposes you to risks that may instead be reduced through diversification. Investors should not expect to be consistently rewarded for taking on nonsystematic risks that could otherwise be diversified away.

Managing Investment Risks

Every investor faces systematic risks that cannot simply be “diversified away.” Because these risks are inherent in participating in capital markets, investors need to determine an appropriate level of market exposure based on their financial goals, time horizon and ability and willingness to tolerate risk.

Remaining disciplined through periods of market volatility can help investors maintain exposure to the long-term return potential of capital markets, but it does not eliminate the possibility of losses or guarantee a particular recovery or investment outcome. That is why investors should take on an appropriate amount of risk for their individual circumstances rather than simply pursuing more risk in search of greater returns.

Diversification helps reduce unnecessary concentrated risk, while asset allocation serves as a broader “dial” for determining the level and types of investment risk within a portfolio.

Your Take-Home

Diversification plays a key role in managing your investment experience by helping reduce concentrated, nonsystematic risks. Asset allocation can then help align your overall exposure to systematic market risk with your financial goals, time horizon and individual circumstances.

This sets us up for addressing another powerful benefit of diversification, smoothing out the ride along the way, which we will cover in the next installment of our series.

This post was written and first distributed by The Writing Company.

DISCLAIMERS

This material is intended for general public use. By providing this material, we are not undertaking to provide investment advice for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation. This is not an offer to buy or sell a security.

Shore Point Advisors is an investment adviser located in Brielle, New Jersey. Shore Point Advisors is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Shore Point Advisors only transacts business in states in which it is properly registered or is excluded or exempted from registration. Insurance products and services are offered through JCL Financial, LLC (“JCL”). Shore Point Advisors and JCL are affiliated entities.