Risk is part of everyday life. From the moment you get up in the morning to the moment you go to bed, you are exposed to many different kinds of risk: The risk that you’ll trip and fall, the risk that you’ll get sick, the risk that you’ll get into a car accident, the risk that your company will suffer financial distress, and many more.
While some risks are unlikely (for example, the risk that you’ll be attacked by a shark on your morning commute), others are more likely (for example, the risk that you’ll get into a fender bender one day). Risks also have potential impacts that must be evaluated. While the consequence of losing a day of work to a minor illness might be negligible, the financial impact of a prolonged absence might be serious. It can be frightening to think of all the risks you run every day, but preparing for these risks can help give you confidence by knowing that you’ve thought ahead and put strategies in place to manage what you can.
So, what is risk? In general terms, risk is exposure to danger or harm. There are many kinds of risk: personal risk, financial risk, market risk, inflation risk, political risk, business risk, etc. In the financial world, you often hear about the “risk-reward tradeoff,” which simply means that the higher return you pursue, the higher the risk of loss you must be willing to accept.
Fortunately, humans have become very good at handling certain risks. We build safer cars, create safety standards, educate ourselves about risky behavior, and buy insurance. In the most general terms, there are four basic ways to handle risk. For example, let’s say that you’re worried about the risk of becoming too ill to work:
1. Ignore the risk.
You could simply ignore the risk of a serious illness and hope for the best.
2. Avoid the risk.
You could choose not to work or choose a job that you believe could be performed while ill.
3. Manage the risk.
You could build emergency savings and take care of your health, but there’s no guarantee that you can protect yourself from a serious illness or injury.
4. Transfer the risk to someone else.
You can purchase disability income insurance that will send you a check every month that you’re unable to work to help you minimize the financial effects of an absence from work.
For every risk in life, you have to make a decision about how you’re going to handle it. Some risks are so unlikely that ignoring or avoiding them is the most logical option. Other risks are ever-present and must be managed carefully to protect your financial future. We specialize in helping our clients identify and carefully manage risks through sophisticated personal strategies. If you’re interested in learning more about strategies to manage and reduce risk, give us a call at (518) 581-1642
Maureen Hallaran, NSSA
& Steve Kamen, NSSA