What You Should Know About Risk Management?

There are three areas of risk management.

• The first area is where you pay someone to share the risk with you (Insurance).
• The second one is analyzing the risk; engage in due diligence for any given financial investment or business endeavor.
• The third area is the perception of risk.

Although this is not a very exciting subject for most people, not paying close attention to this could mean financial ruin faster than just about anything else.

Share the Risk with a Third Party

This is also called buying insurance. One of my guidelines on whether you need some insurance is the following: If you are not willing or able to write a check for a loss, you need some coverage. “Take personal responsibility and budget for it. The peace of mind will greatly enhance your life and put you on the right financial path. “

The following are the different forms of coverage that you need to give some thought to:

Health

- You need at least basic, catastrophic health coverage.
- If you can choose a higher deductible, save money on premium and start funding a Health Savings Account.
- Start taking responsibility for your basic health cost yourself; this should not be a basic right covered by a third party, as food is not.
- If you can purchase your own, shop around to make sure you get the most coverage for your money.
- Work with a good agent who is knowledgeable about health insurance and is familiar with personal situations like yours.

Accident

- Consider accident insurance if you have children and if you have a high deductible health plan.

- It will cover most of the deductible if the medical cost is a direct result of an accident.

Disability

- Having disability coverage is very important to yours and your family’s financial health.
- Think about what would happen to you and your family financially if you could not work for one or two years.
- Coverage through Social Security will not be enough in most circumstances.

Life

- Purchase a term life policy to protect your dependants financially from a premature passing of a caregiver.
- Choose a term that is appropriate for your family’s circumstances.
- Term life is inexpensive, so make sure you don’t skimp on the amount of the coverage.
- Permanent life policies are a tax-deferred investment with death benefits. These are often too expensive to get the appropriate coverage.

Annuity

- An annuity is in a nutshell a reverse life insurance.
- It can give you peace of mind by giving you an income stream so that you don’t have to worry about it.
- Buying such a security has its cost and needs to be looked at with other investment options in mind.

Long-Term Care

A good time to look at Long-Term Care insurance is when you are in your mid-50s because of its cost.

Whether or not you should get it is beyond the scope of this book, but issues to consider are the following:

• How is your financial health – could a nursing home stay ruin the financial security of a younger spouse during retirement?
• How healthy are/were your parents and grandparents when they were older? How long did they live?
• How healthy are you? Have you been sickly all your life?

House / Renters / Auto

- Don’t have a low deductible.
- Have sufficient liability coverage corresponding to your assets and that they are the same for your home and auto.
- Have all policies with the same company for discounts.

Umbrella / Excess Liability Insurance

- Get an umbrella policy to protect yourself from the litigious society we are living in.
- This is one of the most overlooked policies, but when you need it, a very important one.

Analyze the Risk of Any Financial Investment

“The biggest risk you are taking in any financial investment is not under-standing, not knowing what you are getting into. Buying anything just because you heard it was a good investment is foolhardy and the cause of why so many people lose money with their investments.”

It is very important that you do your due diligence. If you can’t or you don’t have the time, have someone that you trust and has the expertise to do it.

If you don’t want to research stocks and understand the company, have the stocks purchased in a packaged form by people who know what they are doing, i.e. mutual funds.

If you make investments outside the financial market, also referred to as alternative investment, become an expert in them or work with an expert.

Make sure you understand that you owe this to yourself and your hard-earned money.

Never participate in an investment that does not feel right or that you have concerns about and can’t be explained to your satisfaction.

Risk can be very calculated and therefore reduced.

Don’t believe the myth that a high return always has a higher risk than a low return on your investments, but you must understand the risk. (I will have more on this concept in the following chapters.)

Perception of Risk

We all have our own definition of what risk is. Here are some examples of why we perceive risk in a certain way but also why it is different for everyone:

• We all have conditioning from our childhood by our parents. Just because our mom or dad had a bad experience and consider something risky, it does not have to be that way. However, we look at it that way because that is what we heard as a child.

• Your own experience over the past years and decades. Maybe you lost money on something because you did not do your due diligence.

• The experience of a friend or acquaintance.

• It also goes the other way around. Some people make money fast, but not knowing or understanding what they are doing might make you lose the respect in the inherent risk of any investment. It is almost certain that they will lose some of the money again.

As I have mentioned, a high return does not necessarily equate to high risk. If you follow the mantra “high return equals high risk”, you are shortchanging yourself in huge potential returns and its resulting financial freedom.

I believe sticking to the so-called “low-risk” investment is a very high-risk proposition and potentially unhealthy to your financial future. You will always belong to the “just getting by” crowd. Fear of losing or failure is our greatest enemy, and that is a risk you can’t calculate.

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