What is risk? Some say risk is a four letter word that can ruin your life. Risk management is serious business. As an industry, it includes over 30,000 companies and generates $6 billion in annual revenue. Risk management is also for the individual.
Risk: First Steps
Risk is the possibility of a negative or undesired outcome. It may be as simple as the risk of being late for an appointment because you didn’t leave on time. Conversely, the risk may be more severe as would be the case if you decided to drive your car after ingesting too many adult beverages. Here’s the point: Having a risk management strategy in place ahead of time can help control the negative outcomes.
The Steps in Managing Risk
Here is a four-step process you can follow to manage your risk.
1) Assess the Risk
2) Categorize the Risk
3) Consider Your Options
4) Implement Your Strategy
Assess the Risk
Assessing risk is determining which, if any, are present. Risks stem from hazards and a hazard is anything which can cause harm. Leaving an open paint container in a place where a toddler can access it is a hazard. Leaving a loaded gun in a place where a child can get it is another.
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The next step is to categorize the risk. A risk can be minor or severe. A risk can also be common or rare. The following exhibit illustrates these principals. Notice there are four quadrants numbered one through four. The vertical axis measures the probability that the risk will occur and the horizontal axis measures the severity of the risk. (detail risk assessment visit link)
Consider Your Options
After determining the appropriate category for a risk, the next step is to select the proper method to address it. The following exhibit illustrates the four primary methods for dealing with risk. They can be remembered with the simple acronym: ATRR or AT Railroad.
- Can the risk be avoided?
- Can it be reduced?
- Can the risk be transferred?
- All remaining risks must be retained.
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This is a basic framework for managing risks. As mentioned, risk management is not only for companies, but for individuals as well. In my next article, we’ll deal exclusively with the risks involved in investing. Did you know there are more than 18 different risks you can face when investing? Stay tuned for more.
I am a CFP professional with extensive experience working with wealthy and affluent clients. After 30 years, having worked with some of the largest firms in the world, I will attempt to lift the veil and take you behind the scenes of the financial services industry. My goal is to educate investors on various aspects of the economy, discuss how politics influence financial markets, and reveal steps you can take to strengthen your personal financial picture and avoid some common pitfalls. I will discuss the universe of investments including mutual funds, ETFs, bonds, and stocks. In addition, I will provide you, the reader, with practical, useable information, to empower you to take charge of your financial life, bringing clarity to the complex.