When you make an investment,typically,you look at the returns rather than the risks. The risk part is usually an afterthought. Recent incidents related to ponzi schemes are a reflection of investing behaviour. Investors are to blame as much as the product pushers,as greed overcomes the need to do basic diligence required to verify the sustainability and,more importantly,the receipt of capital after the investing period of the schemes.
In a volatile investing world,it is paramount that risk management becomes an integral process of your decision-making process when it comes to your wealth,and health. Investopedia says risk management is the process of identification,analysis and either acceptance or mitigation of uncertainty in decision making. Risk management is a two-step process determining what risks exist and,then,handling those risks in ways best-suited to your objectives.
Lets look at risk management in your daily life as in health,life and investment making decisions.
Health: With increased life expectancy and rapid improvement in medical science,a majority of us are expected to outlive the living age of our parents. This will mean that in the event you have to be hospitalised or contract a life-threatening ailment,the cost of cure will either come from your savings or health insurance cover. However,there is hesitancy in buying health cover,typically,if you are a salaried person.
One must understand that with every passing year and age,and with our sedentary lifestyles,chances of contracting a lifestyle disease are high and your organisations health cover for you may not be sufficient to cover the overall cost. Recently,I came across a case where a 45 year old had to undergo angioplasty. While he had health cover from his organisation,it could take care of only 25% of the overall cost and the balance he had to pay from his pocket,dipping into his savings. The prudent thing is to take health insurance cover over and above what your organisation offers. A sound health is the key for your wealth creation initiatives.
Life: When you buy a life insurance cover,generally,the first question you ask is: What is the return that I will get. Now,if you are buying a term life cover,you are only covering the risk of life and not return on investment. It is akin to car insurance,which you regularly take every year and you are glad if there are no dents or repairs in your car during the year. You do not go back to the insurance company asking for refunds.
The insurance company,however,complements your good driving by paying a no-claim bonus. Typically,a life cover is a cover you take to ensure that in the event of you not being available to take care of your family,their needs and wants are continued to be met without cutting down on the existing standard of living. Dipping into your savings and assets is what you will argue about,but why do you want to deplete the assets when you have a better option? Do not be stingy in taking a pure term life cover.
Investments: When you carry out an investment,do you ask what are the risks involved before worrying about the returns? Our mindset is driven towards return and reward rather than risk and loss. And greed and fear is what finally determines your wealth or lack of wealth. Do you have an asset allocation in place? Do you have portfolio rebalancing timeline in place? If you are over-leveraged in a particular asset class,do you have risk mitigants in place? Are you asset heavy and low on cash flow?
Risk management is an integral part of your life strategy. You should not compromise on it. Understand the risks involved in every aspect,take your time and your life,health and wealth will be ring-fenced and risk-protected. Risk aversion is not the answer,risk mitigation is the key .
The writer is founder and managing partner of Zeus WealthWays LLP