Bad driving conditions often produce wrecks, but not every car on the road crashes in a snowstorm. With the exception of chronic worriers, most of us don’t ponder terrible events that could potentially happen. Such forethought, though, is precisely what risk management for your money involves – unexciting, yet vital for investing success.
A recent Tuesday morning in Indiana, where I live, began with rain turning to ice. I journey every Tuesday and Thursday to fulfill commitments to my finance students at Purdue University and to my firm’s team and clients in the nearby Lafayette area.
The morning in question was no different except for the icy highways. I decided making the trip was too dangerous. For just the second time in seven years, I missed teaching a Purdue class due to weather.
Was I wise or not? Can’t say. I don’t have a crystal ball to tell me that I would have made it safely to campus, risking life and limb to teach. Or that would have suffered untimely death or disability from a wreck. Anticipating and diffusing problems often does not allow you to see for sure how things would have played out otherwise.
This uncertainty is a critical aspect of managing risk, whether in life or in investment portfolios. When you opt to not take a specific action, rarely do you see that action’s results. No mess, move on: a big reason we often forget about risk management entirely.
How comfortable are you taking chances with money? How long can you let your investment ride the ups and downs of the market? Whatever your tolerance, you can do four and only four things about risk:
1. Avoid. In my case, I sidestepped the risk altogether and simply stayed home on Tuesday. Similarly, you can choose to not make an investment or to not board a perfectly functioning airplane.
2. Hope. My drive to Lafayette is only 90 minutes: Usually, I accept the risk and head out the door, trusting my driving skills and good luck to get me there. You can also leave all of your money in the still-rising stock of a company that uses fundamentally bad business practices.
Maybe it’ll all work out. Until the stock crumbles or the car crashes, who cares?
3. Alter. I can take other routes every Tuesday and Thursday. I can drive slower to reduce (though by no means eliminate) the risk. Diversification in your portfolio is a good example of this tactic.
As long as the road is smooth and the pace safely fast, going slower or diversifying seems silly. Then you hit potholes and black ice. Then the sector comprising most of your investments – energy in 2015, for instance, or technology in 2000 – falls.
Map that alternate route beforehand.
4. Delegate. I transfer the risk to someone crazy enough to guarantee the trip’s safety in an ice storm. Transferring risk means passing the risk to another – in the case of your car or your life, usually an insurance company. Handing off investment risk is almost impossible; believe no one who tries to tell you otherwise.
Regardless of your choice or risk management style, if nothing bad happens there are no stories, no excitement and no need to regret your lack of common sense.
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Joseph “Big Joe” Clark, CFP, is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This with Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group, Inc, member FINRA/SIPC. Big Joe can be reached at firstname.lastname@example.org, or (765) 640-1524. Follow him on Twitter at @Big Joe Clark and on Facebook at http://www.facebook.com/FinancialEnhancementGroup.
Securities offered through and by World Equity Group Inc. Member FINRA/SIPC. Advisory services can be offered by the Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.
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