A Conversation About Risk

From the moment you were born, you were exposed to a multiplicity of risks. In any conversation about financial planning, and specifically, money, the subject of “risk” comes up. What does risk mean to you? It may mean one thing to you and something totally different to a spouse or partner, your advisor, a business associate, or someone or something else that could influence an outcome. For risk to be managed you must define what risks worry you and then discuss your concerns will all interested parties, especially with your financial advisor. Everyone should be on the same page.

Early in my career as a financial planner, after a stock market decline a client provided a lesson as to why a discussion of risk should be one of depth, delving into the psychology of risk versus reward. As a young advisor I assumed that everyone knew that stocks went up and down and that volatility was understood. Not so much as the gentleman fumed, “Well, yes, I told you I could take a risk but I did not mean I wanted to lose money!”

People take calculated risks every day without knowing the odds. Witness TruTV’s television show, World’s Dumbest. The program “showcases the dumbest of the dumb: brain-dead daredevils, pathetic partiers, outrageous outlaws, and just plain unlucky numbskulls who test the theory that humans are the superior species.” Watching the show you wonder, “Are people really that stupid?”

But it isn’t just crazy stunts that result in injury and death. In 2012, per the Insurance Information Institute, 4,957 motorcycle riders died in fatal crashes, an average approaching 14 per day. How does that stack up against the odds? Sixty out of every 100,000 registered motorcycles were involved in fatal crashes that year versus 14 of every 100,000 passenger cars. So we know that proportionally, riding a motorcycle is more dangerous than riding in a car. Ideally a prudent person engaged in a risky activity or just plain daily living will make sure that his or her financial and estate planning house is in order.

If you are a breadwinning spouse, a key person in a business or profession, a dad or mom, in any role in which others depend on your wellbeing for continued support and success, your management of risk is crucial. Insurance is a major tool in indemnifying those who depend on you from the economic consequences of your death or disability. Had an in-depth checkup lately on your insurance portfolio? Are crucial legal documents in place, up-to-date, and readily accessible to those who will step in if you cannot act for yourself? Will finances be adequate?

When it comes to life events like the financing of educations, marriage, career development, debt service, the raising of and launching of children, growing a business, and independence in retirement, how do money decisions play into the next 10, 20, or 30 years? What worries you?

Like yin and yang, light and dark, with reward comes risk. When it comes to investing does risk mean loss of capital, volatility in markets, erosion of purchasing power, outliving your money in retirement, or all of those?

Every investment has a potential to exceed expectations or to fall short. That’s why you diversify. But the more you diversify, the more you increase the odds that some investment or sector may underperform at any given time. You can over-diversify as well as under-diversify. Stock market volatility seems to be increasing. Bond portfolios will face headwinds as interest rates rise, as ultimately they will. There are bulls, bears, and black swans. How do realities play into your comfort zone or lack thereof?

The conversation about risk should go beyond surface discussions and technical jargon. What challenges will you face going forward? How does money as a resource support the alternatives needed to meet a challenge or power a successful outcome? How do you hedge a particular risk? Do you outsource the risk via insurance or do you retain the risk? What do you forgo in avoiding or mitigating a particular risk?

The goofballs portrayed in World’s Dumbest take risks in the extreme, yet for the prudent risks abound. “Life is what happens while you are making other plans.” Putting risk in perspective is fundamental to sound planning. Add that to your “to-do list” for 2015!

Lewis Walker is President of Walker Capital Management, LLC. Certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC. lewisw@theinvestmentcoach.com