What people mean when they say “market risk”

Risk is not one thing

Several different risks get bundled into the phrase, and they behave differently.

• Price risk — what you hold is worth less than you paid, possibly for years
• Liquidity risk — you cannot sell when you want to without accepting a worse price
• Concentration risk — too much of your money depends on one company, one sector or one outcome
• Leverage risk — you have borrowed exposure, so losses can exceed what you put in
• Behavioural risk — you sell in a fall or buy in a surge, and turn a paper loss into a real one

The last one is the one that gets people

Price risk is a property of the asset. Behavioural risk is a property of the investor, and it is the one you can actually do something about — by deciding in advance what you would do in a fall, and by not checking a long-term holding every day.

Why past returns are not a forecast

A fund that returned well over five years tells you what happened in a particular set of conditions to a particular set of holdings. It does not tell you what the next five years hold, and the regulation requiring that disclaimer exists because people reliably read it as though it did.

This is also why an assurance of returns from anyone selling a market-linked product is a warning sign rather than a selling point. Nobody can guarantee what the market does — and anyone who says otherwise is telling you something they cannot know.

A reasonable way to think about it

Before committing money, it is worth being able to answer three questions plainly: when do I need this money back, what would I do if it fell by a third, and would that answer change if the fall lasted two years. If any answer is uncomfortable, that is information about how much risk suits you — not a reason to look for a product without any.