Ways to Handle Risks
In a previous post, we talked about risks and what it means to you.
So know that you understand what risks are, the next question is “How do I handle risks?”
Believe it or not, you are currently doing these ways to handle risks and you just don’t know it.
One way to handle risk is to totally avoid it.
Meaning, you don’t do the actions that will eventually lead to taking a risk.
For example, if you do not want to take the risk of drowning, you refuse to enjoy swimming, snorkeling or even riding a boat or a yacht.
In personal finance and investing, risk is always present.
There are always risks involved.
We often encounter the phrase “High Risk, High Reward” right? Say “Yes!”
That’s why instead of avoiding risk altogether, we manage it.
This one is self-explanatory.
Reducing risk involves you taking necessary steps to minimize any risk you might take.
For example, if you want to reduce your risk of injury, you properly do stretching exercises before you play badminton or basketball.
Relating this to investing, you reduce your risk by diversification.
You never put all your eggs in one basket.
Diversification entails you to allocate your finances to different investment vehicles with different risk levels.
You have high risk investments in the stock market, low risk investments in savings accounts etc.
That’s another topic altogether so let’s stop at that.
If you are fully aware of the risks involved in any activity you are doing but you still push through with it, that’s retaining risk.
Usually when investing, you retain risk when you try to follow your emotions and not logic. This is common in the stock market.
A lot of undisciplined investors use their emotions when picking companies to buy.
They blindly rely on “hot tips” and don’t do the necessary due diligence.
Remember this sage advice from Warren Buffett
Be greedy when everyone else is fearful. Be fearful when everyone else is greedy.
This is what insurance does.
You invest in insurance so you can share with them the risks that you can potentially take.
If you want to know more of the types of risk that can be transferred, read more here.
Severity vs. Frequency
As a general rule we can consider this quick guide from coursera.org on how to use the four ways to handle risk:
I guess with this, you can now have an idea on how risks and how insurance works.
Do you have more insights?
I’d love to read your comments below!
To our success in all areas of life,
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