Total risk is the combination of all risk factors associated with making some type of investment decision. Identifying all the factors that could come into play means looking closely at both the systematic and the unsystematic risk involved with either buying or selling a given investment, such as shares of stock, bonds, mutual funds, or commodities. This all-encompassing approach makes it easier to choose the course of action that is likely to result in the best possible outcome for the investor.
Both systematic and unsystematic risk, also known as systemic and unsystemic risk, must be considered in order for the total risk to be assessed. Systemic risk involves looking closely at any type of risk that is inherent in carrying a particular class or type of assets and liabilities. Unsystemic risk entails looking closely at any type of risks that are associated with the specific investment opportunity. By approaching the volatility of the investment from both a narrow and a broad perspective, the chances of truly assessing the total risk are greatly improved.
While evaluating the total risk does take some time and attention to detail, the end result is well worth the effort. By taking all these factors into consideration, it is possible to make a more educated projection on the future movement of the investment, and determine if it is worth the resources and the time to buy or retain the holding in a financial portfolio. At the same time, evaluating the total risk can help an investor avoid spending time and money securing a particular investment that ultimately proves to be an incorrect choice.
It is important to note that evaluating the total risk surrounding any type of investment often means looking beyond the more apparent factors, and considering a wide range of variables. It is not enough to simply look at the past performance of shares of stock or the current condition of the business that issues the shares. Factors like the projected movement of the marketplace in general, the possibility of increased competition for the issuing company, and even factors such as upcoming political elections, the general state of the economy, and the possibility of natural disasters occurring must also be considered. While some of the considerations involved with assessing total risk may seem far-fetched, taking the time to consider them along with more likely factors can make the difference between earning a return and incurring a loss.
