Risk is present in everyday life.
If someone tries to cross a road, he runs the risk of being hit by a vehicle.
If he decides to make an investment, he runs the risk of making a loss.
Basically, every action you take involves a potential risk, which upon occurrence, may result in a loss.
Risk can be classified under 2 general categories:
Speculative Risk
Speculative risk refers to a risk exposure that could result in a gain, a loss, or neither.
An example is where a person invests some money in shares. The outcome could result in a gain, or a loss, or just a break even in the investment.
Pure Risk
Pure risk refers to risk exposures that can either results in either a loss, or no loss. There is no possibility of a gain and the best outcome is the preservation of the status quo.
Pure risk can further divided into 4 classes.
- Personal Risk – Risk of being unable to earn an income (eg. due to unemployment, disability, critical illness, etc)
- Property Risk – Risk of losing a property due to damage or theft
- Liability Risk – Risk of being liable to others, as a result of loss caused to them, due to your interaction with them (eg. causing a car accident, causing your company to lose an important business deal, etc)
- Risk due to failure of others – The possibility of suffering a loss due to the action or inaction of others.
The importance of the risk management process cannot be over emphasized.
The main purpose of financial planning is to ensure that your financial goals during and after your lifetime are met. In an ideal world where nothing can go wrong, proper planning and implementation will suffice to realize these goals.
However, life can be unpredictable and unpleasant. Unexpected illnesses, accidents, disasters, and other unexpected events can throw the best-laid plans off track. The risk management process serves to minimize the impact of such events.
Contact our FLA Organization Financial Advisors for more valuable insights on risk management and financial planning today.
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