There are many unknowns when it comes to the future
What is Risk Management?
Risk management is the practice of managing the different threats to the outcome of your financial plan. The things that keep you up at night are these risks. Will I outlive my money? What would happen to me if I got sick or injured? What if the government changed tax law? What if I don’t get social security? What would another recession do to my retirement? Could I afford to extended care in retirement? Will my family be ok if something were to happen to me? These questions can get overwhelming and can throw a wrench in our plan. We must systematically go through these scenarios and find ways to off-load those risks.
How do I Reduce Risk?
You can’t control the ocean, but you can control where and when you go out.
Risk is reduced through defensive strategies that we employ based on the situation. For many clients, the first step is to create an emergency fund. Insurance products come next to create an estate and protect it as it grows. As investors become more complex, risk management comes down to statistical concepts such as standard deviation. The conversation sounds like this: “for the amount of return I need, am I taking on the appropriate amount of risk?” Many times that balance is out of sync as investors take on more risk while pursuing higher returns.