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Balancing Act: Managing Financial Risks

Updated: Feb 19


Managing Financial Risks

Finding Balance Through Fewer Rules

AI developers have recognized that rule-based decision-making can quickly become outdated. Instead, they've shifted towards systems that are goal- and principle-based, capable of adapting to various situations. This method reflects the complexities and unpredictabilities of our financial lives, filled with family crises, marriages, divorces, health issues, and emergency events, alongside the ongoing need to manage financial risks and promote growth.


As our financial landscapes evolve, including more income, assets, and dependents, we're faced with chaos that demands decisions balancing, prioritizing, and acting in a timely manner. The array of financial decisions, from minor to significant, requires us to prioritize and determine which actions need immediate attention based on certain criteria, acknowledging that often, financial risks arise from inaction.


Managing Risk Through Accurate Assessment

Accurately assessing risk presents a significant challenge in risk management. For athletes performing high-risk activities, their skill in real-time risk assessment makes these activities less hazardous for them compared to the average person. Although not infallible, their ability to evaluate and mitigate risks improves as they progress in their sport.


Similarly, as our assets grow, becoming adept at risk assessment is crucial, and seeking counsel is a vital component of our financial strategy. It provides us with a second opinion, addressing a common issue among clients, which is the difficulty of accurately assessing risks.


This accurate assessment is crucial for prioritizing decisions and maintaining balance. In discussions with clients about events or investments, I often find that their perspectives are misaligned with historical data or broader financial industry risk assessments, likely based on biased information. They may perceive significant risks in areas that are improbable or uncontrollable, neglecting more likely risks.


This scenario leads us to question how some individuals amass wealth with what seems simple, making confident financial decisions with minimal errors. Part of the answer lies in their proficiency in assessing, prioritizing, and implementing strategies to mitigate known and controllable risks.


Risk management involves a blend of emotion, belief, ability, and action. It's crucial not to underestimate the impact of emotion and belief. While professional insights are valuable, having a solid belief in the risks and adopted strategies is essential. For instance, without a firm belief in your risk assessment strategy, financial crises can lead to panic-driven decisions.


Below are some commonly identified financial risks to help emphasize the importance of understanding and prioritizing them. Recognizing your significant financial risks is the first step, followed by implementing a long-term strategy you can commit to.


Here are seven risks that most in the industry agree affect an individual's financial health, though this list is not exhaustive. Completely eliminating financial risks is unrealistic. It is common to prioritize and focus on mitigating certain risks due to limited time and resources.


However, it's crucial to recognize that reducing risks in one area might inadvertently increase risks elsewhere in your financial plan. For example, to counter market volatility, risk-averse investors might invest in Certificates of Deposit (CDs) or consider annuities recommended by advisors. While these choices reduce exposure to market fluctuations, they also introduce other risks, such as longevity and inflation risks.


Here is the list of the seven and a short overview of each:

  1. Market Volatility: Refers to the fluctuations in investment prices over time, which can significantly impact the value of an individual's investment portfolio.

  2. Tax Liabilities: Involves the potential for unexpected tax obligations that can arise from various sources, reducing overall financial resources.

  3. Social Security Uncertainty: Pertains to the unpredictability surrounding social security benefits staying up with inflation.

  4. Longevity Risk: The possibility of outliving one's savings, posing a challenge to maintaining financial stability in later years.

  5. Inflation: Represents the risk that the purchasing power of money will decline over time, eroding the real value of financial assets and income.

  6. Healthcare Expenses: Refers to the potential for significant and often unforeseen medical costs, which can deplete savings and impact financial health.

  7. Estate Planning: Involves the risk of inadequate preparation for the transfer of assets upon death, which can lead to unintended consequences for heirs and beneficiaries.

Addressing all these risks in every meeting is impractical. The approach is to work with your advisor to understand your primary concerns, then prioritize and mitigate two or three risks based on current life events. Over several years, this focused approach allows for understanding, mitigating, and prioritizing risks over time. The objective is not elimination but mitigation and management.


 

Questions to Ponder:


  1. When I eliminate a perceived risk, do I consider or even know what other risks this decision might exacerbate?

  2. What are the consequences of not considering tax liabilities in my overall financial plan?

  3. How can I ensure a smooth transition of my financial legacy to heirs, minimizing complications and chaos for my family?


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DISCLOSURE - All written content on this article is for information purposes only. We utilized ChatGPT and other sources for this article. Opinions expressed herein are solely those of Core Wealth Consultants. Material presented is believed to be from reliable sources, however, we make no representations as to its accuracy or completeness. Core Wealth Consultants, LLC a Registered Investment Advisor in the States of Florida, Indiana and Michigan. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Diversification and asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss.

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