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Is Risk Management the Best Financial Strategy?

risk managementWhat is risk management, and how does it affect your investment decisions?

Every investment is risky

Every investment carries a chance of making a profit – and a risk of sustaining a loss. However, some investments are riskier than others. Generally speaking, the more profitable investments contain the most risk; if an investment can potentially make a high profit, it can also cause just as much of a loss. So if you’re thinking about an investment that could give a high return, ask yourself if you could handle that level of loss if it doesn’t work out.

Is it worth taking a chance?

If you’re afraid of risk, you may prefer to play it safe by keeping all your money in a savings account in the bank. You won’t make much profit as interest rates are low, but at least you minimize your chances of losing money. Savings accounts, money markets, and CDs offer protection against risk. However, when the product becomes due, the real value of your money may have decreased if the interest rate didn’t keep up with inflation.

Risk management vs. risk avoidance

Fortunately, when investing, there are many choices and you don’t need to single-handedly embrace or reject high-risk investments. There’s a middle ground: follow a policy of risk management.

For example, if you’re young and have many working years ahead of you, you may be able to withstand more risk than someone nearing retirement since you have time on your side to recoup any market losses. On the other hand, an older worker may be comfortable with some aggressive pieces in his asset allocation, but he might feel the need to have a more conservative portfolio so he doesn’t get a nasty surprise if the market crashes just when he’s entering retirement.

Consult with a financial advisor to help determine your risk level and develop a strategy to manage risk in your investment portfolio.  To learn more about investment risk, click here.

Douglas Goldstein, CFP®, investment advisor, is the co-author with Grandmaster Susan Polgar of Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing and director of Profile Investment Services, Ltd. which specializes in cross border investing and financial planning.

Profile Perspectives is a personal finance blog based on articles Doug Goldstein, CFP®, director of Profile Investment Services, Ltd., published in The Jerusalem Post. The information posted is purely informational and does not constitute investment or tax advice. Advertisements on the site are neither endorsements nor recommendations. Consult your professional advisors before making any investments based on articles or advertisements. Securities offered through Portfolio Resources Group, Inc., member of FINRA, SIPC, MSRB, FSI. Accounts carried by Pershing LLC., Member NYSE/SIPC, a subsidiary of The Bank of New York Mellon Corporation.

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