“Market exposure” refers to how much of our portfolio is invested in one particular thing.
For example, let’s say we’ve got $100,000 invested. $25,000 is invested in bonds, $25,000 is invested in international funds, and $50,000 is invested in our brother’s solar panel company. If we’re talking about exposure as a percentage, we could say we’ve got 50% market exposure in Bubba’s Solar. If we’re talking about it as a dollar amount, we could say we’ve got $25,000 of market exposure in bonds. We can also talk about exposure by region, like if we’ve got $5,000 of market exposure in Southeast Asia, or by industry, or by investment type. Basically, however we decide to slice and dice our portfolio, there’s a market exposure calculation for that.
We all know that the more diversified our portfolio is, the more we’re potentially protected against risk. Ergo (who doesn’t love the word “ergo”), the higher our market exposure is, the more risk we’re exposed to.
Think about it: 50% of our entire portfolio is invested in Bubba’s solar panel company. If that company goes under, that’s going to put a serious crimp in our retirement savings. But if the company takes off, which we’re sure it will, because Bubba is a solar genius, we might want to consider selling some of our shares and maybe diversifying that portfolio of ours just a little bit.