Not all risks are equal
Director of Financial Education
Creative Planning’s Director of Financial Education, Jonathan Clements, explains why it’s important to take potential financial risks into account when developing your investment strategy.
This is Jonathan Clements, director of financial education for Creative Planning.
When financial experts talk about risk, normally they’re focused on a single notion: how much a portfolio bounces up and down in price. But in truth, risk takes many different forms and those different risks should be addressed in a good financial plan.
There are obvious risks. Risks like a family’s main breadwinner dying or suffering a disability, which is why you buy life and disability insurance. But there are also more obscure risks that you need to address.
What about risks that aren’t so obvious? Let’s say you have big investments in commercial residential real estate. How would you cope if there was an economic downturn and you couldn’t find tenants? What if somebody was injured at your home and sued you? What if there was an accounting scandal at your employer and suddenly you found yourself not only out of work, but holding a fist full of worthless shares? What if your business partner died suddenly and suddenly you are faced with this conundrum?
Either you have to come up with millions of dollars to buy out your partner’s family or you could lose control of the business. By thinking about these risks ahead of time and taking the necessary, precautionary steps, we can limit the potential financial fallout. Remember, we get just one shot at taking this journey from here to retirement, and we want to make sure nothing derails our financial progress.
Once you’ve had this risk assessment, it is important to revisit the topic every year or so to make sure there aren’t new risks in your financial life that you need to address. When you do that new risk assessment, one of the things you may discover is that there are steps you are taking that are no longer necessary. Let’s say you invest more than enough money for retirement and you’d be okay if you never worked again. At that point, maybe you no longer need disability insurance. You can drop the insurance policy and save thousands of dollars every year.
This is Jonathan Clements for Creative Planning.