The Risks You Choose: Eliminating the Unnecessary
Series Position: 3 of 4
Role: Integration Deep Dive
S3 Focus: Simple
Internal Link: In Part 2, we looked at the storms we can't control. Now, we eliminate the ones we can.
Here is a radical S3 truth: There are some risks for which the market pays you exactly zero dollars.
In the previous posts, we discussed "Systematic Risk"—the risk of the market itself. The market compensates you for taking this risk with long-term returns (historically ~8-10%).
But there is a second type of risk: Unsystematic Risk. This is the risk of a specific company failing, a CEO committing fraud, or a single industry collapsing.
Taking this risk is not "investing." It is gambling. And in the S3 Constitutional framework, we believe in Integration Over Abandonment—we keep the growth potential of the market while abandoning the unnecessary risk of the single bet.
The "Free Lunch" of Diversification
Wall Street can be complex, but this concept is beautifully Simple.
Imagine you hold one stock: Company A.
- Expected Return: 10%.
- Risk of Total Ruin: High (Bankruptcy is possible).
Now imagine you hold 500 Companies (The S&P 500).
- Expected Return: 10%.
- Risk of Total Ruin: Near Zero (The entire US economy would have to cease to exist).
The Contradiction Resolved: You can keep the same expected return (Sound) while drastically lowering your risk of ruin (Safe). This is the only "free lunch" in economics.
Business Risk vs. Financial Risk
Why do single companies fail?
- Business Risk: They make a product nobody wants anymore (Kodak, Blockbuster).
- Financial Risk: They take on too much debt and can't pay it back when rates rise.
When you concentrate your money in your employer's stock or a "hot tip" from a neighbor, you are voluntarily accepting both of these risks. But the market gives you no extra points for doing so. You are taking uncompensated danger.
The "Loyalty" Trap
We often see clients who have 20%, 50%, or even 80% of their net worth in their employer's stock. They feel "safe" because they know the company. They are loyal.
But this violates the Safe-First principle. If that company fails, you lose your job (income) AND your savings (wealth) on the same day. That is "Double Jeopardy."
The Constitutional Approach: Structural Integrity
We don't guess which beam in the house is strongest. We build a house with thousands of beams. If one snaps, the house stands.
By diversifying, we essentially erase Unsystematic Risk from the equation. We are left only with the Market Risk (which we can manage with time) and we have removed the Company Risk (which can destroy us instantly).
Summary
If you are holding a single stock that makes up more than 5% of your portfolio, you aren't investing—you're betting. And you don't have to.
Are You Carrying "Dead Weight" Risk?
How much "uncompensated risk" are you holding right now? It might be costing you nothing to hold, but it could cost you everything to keep.
Download The S3 Concentration-Buster Tool
Use this worksheet to calculate your "Gambler's Odds" and see how simple it is to maintain your returns while mathematically eliminating the risk of ruin.
This post is part of our collection: Understanding Investment Risk Series.
DISCLAIMER: This content is for educational purposes only and should not be considered personalized financial advice. Always consult with a qualified financial professional before making financial decisions.