Podcast Title: How Do the Rich Really Get Rich?
Podcast Series: Financial Literacy Boot Camp
What is Systematic Risk?
So there is a term called systematic risk. And I have to cover this because it will give context on “how you get rich”. Systematic risk is the risk inherent to a “system”. Think of investing in the stock market and the risk that comes with investing in equities. There are risks inherent to that type of investment that are unavoidable and non-diversifiable. This would be defined as the uncertainty associated with investing in this system.
This is not to be confused with “systemic” risk which is risk similar to the collapse of 2009 where subprime mortgages almost took down the entire financial system. So if you invest in a system (e.g. commodity, stock, bonds, Bitcoin, etc.) you will have systematic risk. Lowering your total systematic risk will be a function of you accessing the types of risk, isolating them, and attempting to mitigate each individual risk. This is nearly impossible which is why it is inherent to the system.
What is Nonsystematic Risk?
Which now brings me to non-systematic or unsystematic risk. This is risk not inherent to the system but instead is very specific and is able to be diversified. If you were an Enron employee in the early 2000s and most or all of your 401(k) was in Enron stock you have both systematic and nonsystematic risk, the latter due to the lack of diversification in your portfolio. Nonsystematic risk can always be reduced or eliminated by spreading your investment dollars across multiple asset classes.
So How Do the Rich Rreally Get Rich?
Well, in short, they have a lot of nonsystematic risk in their portfolio. They have very concentrated positions in their portfolios. They usually use leverage to magnify their concentrated bet also.
Is this safe…? It totally depends on the person.
In Ashvin Chhabra’s book, The Aspirational Investor, he has a chapter entitled: “How Do People Become Very Wealthy?” he talks about the Forbes 400 list and the 4 categories of wealth that comprise the list.
1) Business Owners comprise 60% of the list
2) Financiers comprise 20% of the list
3) Inheritors comprise 12% of the list
4) Real Estate Veterans comprise 8% of the list
#financialliteracy #financialadvice #financialplanning #forbes400 #wealth #rich #money #episode54
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