Modern Risk Management
Main Idea: Having an understanding of the proper amount of risk to take in your financial plan can be one of the most important matters to pin down regardless of your age, net worth, or goal.
"Risk comes from not knowing what you're doing." – Warren Buffett
There are a lot of great quotes on risk out there.
The above is one of my favorites, but for this short piece we'll call risk the chance of an outcome being different from what’s expected. Fair?
Risk is something I think about everyday. Not just because I'm a financial planner, but also as I drive to work, as I eat lunch, and do just about everything in between.
Whether we realize it or not, we all manage risk in some way, it's just a matter if it moves us closer to or farther from our goals.
Why Does Risk Matter?
Risk is one of those words that is used to put people to sleep.
It normally takes a special person to go into a career that focuses on risk management, but these people are typically smart, technical, and vital to a company.
The same goes for your investments and financial plan.
Your feelings about risk may come from losing/making money through investments in the past, being relatively new to investing, or just your natural personality.
There is no right or wrong answer here, only that the amount of risk you are taking fits with your goals, and that the risk you are taking you are being properly compensated for.
Your desired balance between aggressiveness and defensiveness is the number one priority of setting up your portfolio.
Think of it like managing a soccer team. If I have 11 players, I balance them between offense and defense based on the game plan. You can go all-in offensively and risk big losses, or play defensively and avoid big wins.
The same holds for investing: the balance between aggressiveness and caution is key.
CONCLUSION
With that in mind, here are 3 principles I like to consider when I talk about my own investments that maybe resonate with you as well:
So which of the two are better? Can’t say. There are only trade offs. The choice between the two is subjective, largely in part to the investor’s attitude toward risk.
End.
My wife has informed me these articles are getting too long.
She's smarter than me, so I'm going to heed that advice and start making these shorter and more digestible (hopefully).
Good follow up to read: Talking about risk can get a bit technical, but Howard Marks does a good job of making it easy to digest. Read here.
Action Item: As mentioned, understanding and planning for the risk you're willing to take should probably rank at the top of your concerns with your investment & financial plan. If you haven't discuss this with your financial advisor today.
This content reflects the opinions of the author and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as financial, legal, tax, or investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not indicative of future results. All investing involves risk, including the potential for loss of principal. The information contained in the commentaries is derived from sources deemed to be reliable, but its accuracy and completeness cannot be guaranteed. This material does not have regard to specific investment objectives, financial situation, or the particular needs of any specific reader. Any views regarding future prospects may or may not be realized. Neither Asset Allocation nor Diversification guarantees a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.