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Risk Management — So Much More Than Just About Losing Money

Sarah Bromley
Sarah Bromley
June 22nd, 2022
man on a sky ladder

Risk management is part of being human, and it’s certainly not reserved for the financial realm. Let’s look at why risks matter and how to approach them.
Pluck a random person with limited financial knowledge off the street, and we can guarantee they have experience in assessing risks. Marrying your childhood sweetheart even though someone better could come along later? It’s a risk. Playing the field even though it could mean that “the one” gets away? Also a risk. These might sound like strange examples, but they show that we can’t get away from risk management.

At Vyzer, we help investors track their wealth, so we know how important it is for them to balance their risk exposure with their goals. Yet most people don’t realize they’re already managing risks all the time. Let’s take a look at what risk management is (both inside and outside of the context of finance) and how to approach it effectively.

What is risk management?

In a nutshell, risk management is all about figuring out how much uncertainty you’re willing to take on and using that to make decisions. It can be a conscious process that involves identifying and quantifying specific risks, but in many cases, this decision-making happens without us even realizing it.

Risk management: Real-life examples

How many insurance policies do you have (that weren’t a requirement set by the government or a mortgage provider)? The answer to that question tells you plenty about your risk preferences.

What about the career path you followed — did you leave school early, skip college, and start a business? Or did you go to college for a useful subject and climb the ladder gradually? That’s another big indicator of your attitude to risk.

How to make a risk management plan

Lewis Carroll once said that “we only regret the chances we didn’t take” — phrases like this show just how embedded risk management is into our culture. Taking risks is part of life, and the ones we decide to take (or not to take) define who we become.
We need to be a little more conscious about how we approach uncertainty. Making a risk management plan might sound overly rigid and technical, but a lot of it is just an extension of our usual thought patterns.

There are three essential steps to managing risk:

  1. Assess — which specific risks do you face?
  2. Categorize — which risks are the most and least severe?
  3. Educate yourself — what can you do to reduce each risk?

Once you have a clearer idea of what you’re facing, you can apply different strategies to manage each risk. Here are some common approaches:

  • Avoid the risk completely because the threat is too high
  • Sharing the risk with others to reduce the impact of uncertainty.
  • Transfer the risk to another party (e.g., in exchange for money)
  • Hedge against risks by preparing for a few possible outcomes

Risk management in finance

So far, we’ve talked about risk management in a pretty general sense to demonstrate just how relevant it is to our everyday lives. But everything we’ve examined also applies naturally to the financial side of risk management.

Before a fund manager invests in an asset, they need to weigh up the potential risks and returns. Some investors have a risk-loving profile, while others prefer to take a risk-averse approach — this determines how they’ll balance the two factors.

Let’s look at some of the most common types of risks you’ll encounter when investing:

  • Liquidity risk: The risk that you might need cash but be unable to access it due to an investment lock-in period.
  • People risk: The risk that the person you trust your money with when investing could cheat or deceive you by stealing your money or committing another act of misconduct.
  • Performance risk: The risk that your investment’s performance won’t meet your expectations within a certain timeframe (in terms of ROI, IRR, CoC, or other metrics).
  • Market risk: The risk that changes in the market or economy could affect how well your investment performs (e.g., a housing market crash or rising inflation).

How to manage financial risks

This long list might sound intimidating, but you can use the same basic framework and strategies we’ve outlined already.

There are also some additional strategies you can employ, such as:

  • Diversify your portfolio so you’re exposed to different markets, asset classes, and fund managers — they’ll all follow different patterns and approaches.
  • Rebalance your portfolio frequently in line with the latest market activity to change your risk profile.
  • Ensure that a proportion of your net worth is liquid so you have the flexibility to either face complications or double-down on opportunities.
  • Invest smaller amounts over a longer time period instead of investing one lump sum at once.

Would you risk it for a chocolate biscuit?

Next time you’re carrying out a complicated calculation to figure out if you should invest in NFTs or real estate, remember that you’re doing something humans have done for as long as they’ve existed. And regardless of whether you’re assessing the risk of investing in a particular asset or doing zero preparation for a work presentation, the basic principle is the same.

As we’ve seen, risk management doesn’t have to be as frightening as it sounds — but it can certainly help to involve others in the process. After all, sharing your risks is one of the key ways to mitigate it. At Vyzer, we can help you with risk management by ensuring you stay on top of your portfolio and its allocation, making it easy for you to rebalance when needed.

Why not sign up today and try it for yourself?