Taking on a comfortable level of risk can be exciting and beneficial! Do you know the four types of risk and a few ways they manifest in our financial lives?
Recently at a gathering of business women, I gave a short presentation on risk with two pieces of paper.
These are four strategies for dealing with the possibility of being hungry while away from home. Maybe you can imagine yourself choosing any of the options depending on the situation. None are right or wrong; they are simply a choice one might make.
With the second page, I show that these four strategies exemplify the four types of risk:
Let’s compare Risk Acceptance with Risk Avoidance. Acceptance means that come what may, you will accept it. At first glance, it could seem that Avoidance means something like this, but Avoidance means that you will take action in order to reduce or eliminate damage.
What are some examples of each risk type?
Risk Acceptance: no action to mitigate. This could include having your entire portfolio invested in one company (like your employer), having no insurance, or generally “putting all your eggs in one basket”.
Risk Avoidance: Seek to eliminate potential for damage. To some extent, you can avoid risk using annuities to create a guaranteed income stream. You can also avoid risk by having your taxes done by a well-regarded tax pro rather than doing them yourself, or spend well within a budget.
Risk Transfer: Someone else assumes the risk and consequence. This is how insurance policies help, by paying you or your beneficiaries the face value of the policy, should damages or loss of life occur.
Risk Reduction is the attempt to limit harm. We can reduce risk by having a well-diversified investment portfolio, by creating a 3-6 month easily accessible emergency fund, creating a “retirement roadmap” and making a plan for meeting your future financial needs, or opening and funding a 529 college savings account for a child.
I am here to help reduce risk in your financial life! I can help you assess financial risk and find solutions ranging from creating a retirement roadmap, suitable portfolio or life insurance. Email me at erin.mccloskey@ceterafs.com and we will get started!
Disclaimer: A diversified portfolio does not assure a profit or protect against loss in a declining market. Investors should consider the investment objectives, risks,charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing. Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investment in any state’s 529 Plan.