Market exposure is the degree to which an investor is participating in the risks and returns of the market as a whole or a particular sector. Exposure can have a positive or negative connotation, but, as they say, “nothing ventured, nothing gained.”
Market exposure allows an investor to participate in the potential upside of the market, but can also subject the investor to the inherent risks. Some people save money religiously but are not likely to retire the way they want to because they aren’t willing to let their money be risked in the market.
With the diversification provided by mutual funds and ETFs, however, it is more possible than ever to invest relatively small amounts and to have exposure to a wide variety of underlying investments, which provides a hedge against the failure of any single investment in the portfolio.
An investor may not be well-served by 100% market exposure as they get closer to retirement. At that point, it will be prudent to hold some cash and risk-free assets such as Treasury Bonds so that the investor’s entire nest egg is not exposed to the market. In that context, market exposure holds a more negative connotation.
Exposure is a term that can also be used in reference to sector or industry or international market participation. Exposure to various markets and asset classes is a major part of modern portfolio management.