for the REAL WORLD
“Psychology and emotion leave us wanting to buy following gains and sell following losses. Reality begs the opposite.”
- Douglas Brymer, President & Wealth Advisor
The term “risk management” can be defined in one of two ways. For one investor, “risk management” refers to managing the amount of risk in their portfolio. For another, it might mean the use of insurance to protect loved ones, or against loss. Risk management for the Real World incorporates both into the wealth management process, and recognizes the importance each.
In our opinion, the investing community as a whole – both investors and their advisors – too often ignore the importance of properly managing portfolio risk. In many cases, problems stem from not initially identifying an investor’s true tolerance for risk. When investors fail to properly match their risk tolerance with their investment strategy, it lends itself to constant disappointment with the results. Consistently “buying high and selling low” can result in financial devastation, and is most often caused by not understanding one’s tolerance for risk before investing. Yet many financial advisors seemingly create investment strategies for their clients based on their own tolerance for risk – effectively ignoring how the client will react when markets take a turn for the worse.
Risk management refers not only to protecting an investment portfolio, but also the use of insurance to protect against other types of loss. There are many types of insurance – life, health, disability and long-term care to name a few – all of which have differing degrees of importance depending on the client’s needs. Unfortunately, there exists no “magic formula” for determining whether one has the right amount of any type of insurance. A responsible conversation about the topic should include the following:
Who are you needing to protect?
What are you needing to protect?
Why are you needing to protect it?
When and for how long do you need protection?
= How are you going to protect it?
Identify that which needs to be protected, then create and update protection strategies in line with changes in personal circumstance. Never ignore the roles of psychology and emotion in regard to investing – and make certain to understand your true tolerance for risk before investing. That is Risk Management for the Real World.