Let’s start at the beginning by defining risk.
What is risk?
Risk is a situation where your pre-defined goals may not be met and the degree by which your definitive goal targets have not been met.
Following inferences can be made from the above definition:
- Firstly, risk could mean anything. It does not always have to take money into account.
- Risk is often individual. It could be a hit and miss situation for one individual while it may not affect the other individual at all.
- Risk accounts for both the probability of occurrence of an irrational event as well as the degree of irrationality of the same event.
- Risk for one individual could mean huge financial losses while for the other it may be as simple as missing a vacation.
The shortcomings of the above definition are also tantamount:
- No specific time period is ever specified. The fact that risk can be a time event has not been taken into consideration.
- There is no specific technique for calculating risk. It all depends upon the situation under observation.
What Is Financial Risk?
I will try to explain financial risk using several examples. Examples make for easier understanding than a blatantly dictionary read textbook formed definition.
- Your social security benefit plan gets cut by half or less.
- You lose your business, are unable to find suitable employment opportunity and as a result default on your bills.
- One or more of your children are unable to go to college due to lack of money and access to funds.
- Disruption of the economy when a lender bank finds that its borrowers default on the payments and at the same time, it is unable to find a lending partner.
Financial risk may be something like a bonded pension plan. Let us explain how.
You want a certain return on your personal investments, taking both current and future consumption into account.
If you find that returns are low and that there would be less returns on your investments in the future you would do either of the following:
- Save more today.
- Cut down on future expectation.
These are obviously hard decisions for anyone to make. However, one commonly adopted approach is to invest more aggressively. There is a common misconception that if you invest more you will earn more therefore you should take greater financial risk.
The above theory is absolute myth and as thus has been completely debunked by Outsource Financial Research firm Market Quotient.
The following article deals with this idea in much greater detail
However, we can dish out an uncomplicated summary.
According to Outsource Financial Research firm Market Quotient, to manage financial risk, you should adhere to some of the ideas stated below:
- Choose your assets carefully taking your future estimated needs into account.
- Be moderate with regards to your assets and conservative on the kind of returns you can expect from your assets.
- Keep your options open and flexible.
- Take irrational circumstances into account, get proper insurance and be judicious with your spending.
Market Quotient is here to help you every step of the way. We provide general consulting services, financial risk reports and miscellaneous other services to help you in each and every step of the decision-making process.
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