Risk management is to be treated with the utmost respect and a no nonsense attitude. There are few things that could be more detrimental to a portfolio’s bottom line other than an overload of risk that is hastily managed.
However, risk management can be quite complicated as many are unfamiliar with the proper process to successfully mitigate risk exposure.
Although there are are myriad of solutions that exist to aid in risk management, we want to focus on the most efficient ways to curtail risk exposure.
5 Effective and Efficient Techniques For Risk Exposure Management
- Acknowledgement of Risk – Defined by Investopedia as A risk management method used in the business or investment field. Accepting risk occurs when the cost of managing a certain type of risk is accepted, because the risk involved is not adequate enough to warrant the added cost it will take to avoid that risk. Often times this strategy is deployed because the high cost associated with avoiding the risk may be prohibitive. For example, imagine you were attempting to move your business to south Florida where hurricanes and flooding are prevalent but the market for the business is perfect. The positive financial impact on the business is greatly outweighed by the rare event of a catastrophic natural disaster. Thus, is not enough to prevent the move and the company would be effectively accepting risk. It is important to note that this strategy should not be used as a “fall back” option out of laziness or carelessness.
- Stop the Search for the Silver Bullet – The latest and greatest investment fad or get rich quick scheme is not the answer to becoming an instant millionaire. Often overlooked but very effective when implemented properly, alterations to an existing strategy is generally enough to boost performance while reducing risk.
- Transfer of Risk – The ability to shift risk elsewhere is generally an easy process. The transference of risk can take place in many different forms but generally happens through a third party such as an insurance or legal contract. In investments, hedging your portfolio with different investment products such as derivatives or options (understand put-call parity) contracts can help mitigate exposure to headline risk. Be sure you fully understand the product and/or contract you plan to use and confirm it establishes an acceptable level of risk without the cost being too great.
- Refine Existing Strategies Before Implementing New One – Often times, deployment of new strategies or techniques without first scrutinizing existing procedures can prove to be a costly mistake. Honing existing skills currently in place is a better and more cost effective option.
- Utilize Risk to Foster Growth – Taking on some risk is a positive as it is needed to achieve success. Ultimately, the degree of growth is directly correlated to the amount of risk undertaken. Remaining alert to established risk parameters and abiding by them will foster the ideal environment for long term growth. You can read more on the current state of risk management and how the proper process is in high demand here.
The Bottom Line
Planning for success requires constant evaluation of risk management and especially calculating risks being undertaken. The right management plan to mitigate risk and guard against loss is an evolutionary process.
By lessening the potential serious impact on your life with a sound risk exposure management plan you will enhance your overall potential for success and financial freedom!