No matter what your financial goals are, achieving long-term financial success requires having a firm understanding of your risk tolerance and implementing strategies to balance your personal financial risk.
Typically, younger investors can withstand higher levels of risk as compared to those closer to retirement age. However, as with all financial planning, it depends on the individual investor.
To secure your family’s financial future, learn these three wealth management strategies for neutralizing financial risk.
#1. Understand And Offset Your Risk
Many people don’t understand the risk level of their investment portfolios. Some who consider themselves risk-averse and believe their portfolio is very safe actually have a high-risk portfolio.
One reason for this dissonance is too much trust in individual companies’ stocks. If you or your parents work for or worked for a particular company, you may have too much of your money in that company’s stock. Even if you view that company as a very safe investment, this is a bad strategy.
Even seemingly bulletproof companies can decline. People used to think of Lehman Brothers as a very safe investment. Ask anyone who kept their money in that company until the bitter end if they think that was a good strategy.
You need significant diversification in your portfolio. For each investment you have, you need a corresponding investment that offsets that risk. For instance, the international bond market and the domestic real estate market have little to do with one another. If you allocate a portion of your portfolio to each, you’re unlikely to see both significantly decline at the same time.
The other key to managing the risk of your portfolio is to remain active and vigilant in its management. Always know where your money is and which investments are going up or down. This does not mean making hasty decisions and selling all of your stock every time the Dow stumbles, but you do need to be aware and frequently communicate with your financial advisor or wealth manager.
#2. Focus On The Liquidity Of Your Assets
You also need to make sure that too much of your net worth is not tied up in hard-to-sell assets. This is especially relevant for business owners.
For many business owners, the largest asset in their portfolio is their business. When these business owners start to think about retirement, they need to make arrangements to sell this asset. This may be trickier than expected. If a great deal of your net worth is tied up in the value of your business, you should expect it will take you between five to 10 years to sell your business.
You should also acquire a mix of more liquid assets that you can draw on when necessary. This offsets your risk and helps you avoid a situation where you have to sell your business for less than its worth simply because you need the cash.
#3. Plan For The Unexpected
Finally, when managing risk and planning for a comfortable long-term future, you need to expect the unexpected.
It’s not pleasant to think about, but you or your loved ones could become seriously ill or die unexpectedly. For this reason, you should strongly consider purchasing both long-term care insurance and life insurance policies. In the event of a tragic illness or death, these policies will help prevent you from having to drain your assets at a faster rate than you’d planned. It also doesn’t hurt to save a bit more than you expect you’ll need.
Account For Investment Risk To Achieve Long-Term Financial Success
When you understand your individual risk tolerance and implement financial risk management strategies, you’re able to withstand market fluctuations and other changes in your financial situation. Follow the financial risk neutralization strategies above to secure your financial health throughout every stage of your life and into your retirement.
Talk to a professional today to see what wealth management strategies can secure your family’s financial future. Schedule a free consultation.
