As an investor, you recognize the value of reducing financial risks to strive for long-term success. However, managing the intricate world of investments may be intimidating, and it’s easy to ignore possible risks. Risk management with a financial advisor may help in this situation.
Types of Financial Risks
Market risk is the chance of losing money as a result of fluctuations in the market. For instance, you might lose money on your investment portfolio if the stock market declines..
Credit risk is the possibility of suffering financial loss as a result of a borrower defaulting on a loan.
Inflation risk is the threat of losing purchasing power as a result of inflation.
How to Help Mitigate Financial Risks
In our opinion, diversifying your portfolio may help to reduce these risks. To help reduce market risk, consider diversifying in a mix of stocks, bonds, and other assets. Credit risk can also be reduced by investing in high-quality bonds. Additionally, considering investing assets in gold or real estate may help hedge your risk against inflation.
Assess Risk and Return
We believe assessing risk and return is crucial in striving to mitigate financial risks. Before investing, it’s important to understand the potential risks and rewards of each investment.
One way to assess risk and return is to use the Sharpe ratio. The Sharpe ratio measures the excess return per unit of risk. A higher Sharpe ratio indicates a better risk-adjusted return.
Another way to assess risk and return is to use the Modern Portfolio Theory. This theory suggests that investors can minimize risk by diversifying their portfolio across a range of asset classes. The theory also recommends investing in assets with low correlation to each other.
It’s also important to know where your money is going. To do this, review your portfolio regularly as this can help you identify potential risks and make adjustments as needed.
Additionally, we feel working with a financial advisor can help you better assess risk and return and help you make informed investment decisions.
Consider Insurance
Insurance can be a valuable tool in helping to mitigate financial risks. There are several types of insurance to consider, including life insurance, disability insurance, and long-term care insurance.
Life insurance can provide financial support to your loved ones in the event of your death. Disability insurance, on the other hand, can provide income replacement if you become disabled and are unable to work. Lastly, long-term care insurance can provide financial support for long-term care services, such as nursing homes or in-home care.
When considering insurance, we feel it’s a good idea to work with a financial advisor who can help you determine the best insurance options for your situation.
Create a Risk Management Plan
Now that we’ve explored the different types of financial risks and how to help mitigate them, let’s discuss how to create a fiduciary risk management plan. A risk management plan is a comprehensive approach to managing financial risks that is tailored to your specific needs and goals.
To create a risk management plan, you’ll need to:
- Identify your goals and risk tolerance
- Assess your current portfolio and potential risks
- Develop a diversified investment strategy
- Monitor and adjust your portfolio as needed
Working with a financial advisor can help you create a risk management plan that is designed to meet your personal needs.
At Cold Harbor Financial, we offer a wide range of financial services, including fiduciary risk management. Contact us to learn more about how we can help you create a risk management plan that is tailored to your needs and goals. Our commitment to providing the highest level of professional guidance and personal client service means you can trust us to proactively address your needs and build a long-term relationship.
Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
All investments are subject to risk, including loss. There is no assurance that any investment strategy will be successful. Asset allocation and diversification does not ensure a profit or protect against a loss. It is important to review the investment objectives, risk tolerance, tax objectives and liquidity needs before choosing an investment style or manager.
Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.
Holding stocks for the long-term does not insure a profitable outcome. Investing in stocks always involves risk, including the possibility of losing one’s entire investment.
Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
Gold is subject to the special risks associated with investing in precious metals, including but not limite d to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability, and the market is unregulated.
These policies have exclusion and/or limitations. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company.
Sharpe Ratio is a measure of the risk-adjusted return of a portfolio. The ratio represents the return gained per unit of risk taken. The risk of the portfolio is the Standard Deviation of the portfolio returns. The Sharpe ratio can be used to compare the performance of managers. Two managers with the same excess return for a period but different levels of risk will have Sharpe ratios that reflect the difference in the level of risk. The performance of the manager with the lower Sharpe ratio would be interpreted as exhibiting comparatively more risk for the desired return compared to the other manager. If the two managers had the same level of risk but different levels of excess return, the manager with the higher Sharpe ratio would be preferable because the manager achieved higher return with the same level of risk as the other manager. The Sharpe ratio is most helpful when comparing managers with both different returns and different levels of risk. In this case, the Sharpe ratio provides a per-unit measure of the two managers that enables a comparison.
