Any stocks or mutual funds you own will invariably suffer losses if the stock market takes a plunge. And so will any bonds you own if the bond market collapses. The risk that the fortunes of the general market for an asset will adversely affect that particular asset is market risk. For example, at the start of an economic boom when inflation and interest rates are low, bond markets will likely not do as well as stocks. Or when U.S. stocks are in a cyclical decline, foreign stocks may be heading up in tandem with business cycles in the respective countries.
Political conditions can also affect the market's behavior.
The run up to elections or times of political crisis bring increased uncertainty and therefore risk. Diversifying into different asset categories and different countries is key to reducing market risk. This is the risk that comes from the possibility that an investment will have to be reinvested at a lower interest rate or at a higher price. While an increase in interest rates results in a fall in bond prices, a decline in rates presents a reinvestment risk for investors. Many bonds contain a provision which allows issuers to redeem or call in all or part of the issue before the maturity date.