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Risk Management Research Team | Posted On Tuesday, March 24,2009, 07:23 PM

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Risk Management



As per "Murphy's Law", "Whatever can possibly go wrong will," is the first step in determining risk. A person has four choices when dealing with risk :

  • 1. Accept the risk.
  • 2. Avoid the risk.
  • 3. Transfer the risk

Accepting the risk

Accepting the risk is ofcourse the most economical course as it involves doing nothing. That is the way you usually accept risks with very long odds and against which you feel helpless at any rate, such as nuclear war or chances of a meteor striking you or your property.

Avoiding the risk

You choose to avoid the risk when you sell a property at a discount with no guarantees or a broker decides to have no salesmen because he does not want to be responsible for their actions, or a family decides against keeping a dog because of the possible harm it may cause to other people or their property, or one decides to take public transportation rather than drive to work to avoid accidents.

Transferring risk

Transferring risk is very important. Transferring risk to a third party who agrees to take the risk from your shoulders in return for the payment of a certain sum of money, is what insurance is all about.

How risk affects your money now and in the future

Risk is integral to investing, and it is important to understand your tolerance for it. The good news is that investments offer a range of risk levels, which allows you to choose the avenues that best match your mind. Traditional savings accounts are guaranteed, but you pay for that guarantee with relatively less returns. With stocks, on the other hand, the price per share may go down in value and lose principal, but it may also go very high. In return for increased risk, a mutual fund offers the potential to increase in value.

One aspect of risk is fear of the strange. We can shed some light on the kinds of risk that can affect your financial situation, both positively and negatively. The key is to find your personal comfort zone by balancing potential risks in hopes of realizing potential reward. Just remember there is no guarantee in any characteristic of your life, so do not expect it to be different where your money is concerned.

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