Systemic Risk vs. Systematic Risk

Systemic risk vs systematic risk

In order to make money through investing, you have to endure some amount of risk. No opportunity is a slam dunk. While in some cases risk can be extremely low, it also means that your return likely isn’t that high.

Indeed, every opportunity presents a balancing act between risk and return. There are ways to tip the balance in your favour, but understanding what risks are present and how they are defined will better set you up for success.

Types of risk

There are two main types of risk: systemic and systematic. Naturally, these words are often confused, but the differences are important to understand.

Systemic risk

The word systemic itself refers to a specific system: a wide-ranging grid, framework or integral mechanism. Something systemic points back directly to a singular institution, method or industry.

So what is systemic risk? That’s a risk that arises as a result of a complete shutdown, collapse or failure of an entity or process. It can be small, such as a security issue or bug in a computer network. It can also be massive, such as a financial meltdown of a major bank.  Examples of systemic risk in real estate can be a global financial firm filing for bankruptcy, or a global pandemic disrupting the hospitality industry.

Systematic risk

This type of risk involves a series of interacting and dependent factors; pointing to a specific cause is trickier than systemic risk. It also may be referred to as market risk, undiversifiable risk or aggregate risk. Any number of unpredictable or evolving factors can contribute to systematic risk, such as economic recessions, natural disasters, war, geopolitics and changing interest rates.

Systematic risks are pervasive; they do not redirect back to a specific company, industry or issue. They are more complex, harder to plan for and just as difficult to solve.

Protecting against risk

Systemic risk can be hedged against through diversification. For example, if you are investing in only one company or sector, and that company or sector collapses for whatever reason, your investment is going to go down with it. However, if you’re investing in a variety of industries or sectors and a single one tanks, you’ve other places to prop you up.

Diversification isn’t just done by spreading around investments in different industries, but also different assets. Notably, investing in real estate with its relatively low volatility can keep a portfolio going should an asset like stocks or crypto experience a downturn.

Protecting against systematic risk is a bit more difficult, although diversification among assets is still the answer. That’s because real estate may respond differently to a systematic problem than stocks will. Consider the pandemic: that is a systematic problem that affects a range of industries in various ways. While some stocks fluctuate wildly, real estate, while initially down, has been on the rise for the last year-plus.

It’s worth noting that you can’t protect nearly as much against systematic risk as you can against systemic risk, especially in the short term. Systematic risk can shock all investments, which means a downturn is likely. Being able to weather that downturn and knowing not to panic can help in the long run.

addy risks and rewards

addy allows the average Canadian to invest in previously inaccessible commercial real estate properties. This allows for portfolio diversification and a chance at passive income; not to mention the dream of property ownership. There is even diversity within the properties that addy offers: types vary among risk and rewards, and terms vary as well, with some deals estimated for two years and others seemingly endless.

As a limited partner in deals, addy and its members only risk their investment. Property maintenance or management is not required. As a member, you can invest anywhere from $1 to $1,500 based on your risk appetite and financial goals and all your money goes towards your investment without any management or other hidden fees.

Invest in real estate with addy:

One thought on “Systemic Risk vs. Systematic Risk

  1. Cameron says:

    Some diversity is key to protecting your self from excessive risk. Buying into multiple properties across different types (commercial, multifamily, hospitality for example) spreads the risk and protects you. addy makes it so simple to spread your real estate dollars out between not only different types of property but different provinces and different managers. addy is a great way to invest in real estate because of these factors.

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