In a previous post, we explored the nature of risk. We had discussed that engagement with risk is necessary, and that engagement with risk brings about uncertainty. The manifestation of risk can be understood by using the construct “If a particular event occurs, then a particular impact occurs”. Further, the management of risk is then focussed on either reducing the probability of the event occurring, or on reducing the impact of the event. We will consider this with examples.
Let’s consider the event of death. That death will occur is certain, however, when death will occur is uncertain. Here risk manifests as “If the event of death occurs within productive life, then the impact of financial strife for family occurs”. Now that the risk is articulated, we proceed with its management. ‘Living healthy’ is an action one can take to reduce the chances of the event occurring. In any case, we are unable to completely eliminate the possibility and so we have to also reduce the impact. To reduce the impact, we cover this risk by a life insurance of an appropriate amount.
Another manifestation of the life risk is “If the event of death occurs in the distant future, then the impact of having to manage expenses for this period without having an active income occurs”. Here, our ability to control the chances of the event occurring are negligible, and risk management is almost entirely about controlling the impact of the event. This we do by careful retirement planning, by extending our productive life, by provisioning for health risk, by building a retirement corpus, etc.
In the investing space, risk can be expressed in various ways –
This manifestation of risk and its relationship with you and with the value of your money, is diverse and varies from person to person. A professional financial planner is trained to look at this relationship objectively and provide a plan of action that is uniquely suited to the investor.