We are all just passing through the Life Stages of a lifelong journey. None of us know exactly how long the journey will take and we are all learning more and more about the challenges and risks of our principal activity along the way – LIVING in the present. To date my own experiences and interests have been significant in forming a philosophy on many areas, and no doubt this risk philosophy will continue to evolve on life’s journey.
Risk was referred in a Stanford University study to situations in which it is possible but not certain that some undesirable event will occur and is defined as the cause or probability of an unwanted event which may or may not occur.
Generally there are high, medium and low risk events which may or may not occur. What we sometimes struggle with is the assessment and management of risk in certain everyday situations. A good place to start with any risk assessment is what common risks are referred to and what would be the consequences if that event occurred? The elements of a risk appraisal process would include the following aspects:
Event. What event and what are the consequences?
Probability. How likely is the event to occur?
Impact. How bad will things be if the event does occur?
Mitigation. How can you reduce the probability?
Contingency. How can you reduce the Impact?
Reduction. What is the reduction in risk due to the actions you have taken?
Exposure. The exposure is equal to the original risk minus the reduction.
With regard to the above, whether you are seeking to plan for life’s common risk events like for example dying young, a long life (income in retirement), or investing wisely, a financial planning strategy is needed for both mitigation and contingency. Knowing what risks are relevant and not relevant will help you de-clutter your financial plan. Furthermore, because the common risks are always changing through the passage of time, the need for perseverance in continual monitoring and reviewing of circumstances is a critical activity and a critical part of our risk management strategy for you.
The purpose of this philosophy is to demonstrate that we view life’s events critically for you, help you identify and understand common risks and advise on outcomes and solutions for dealing with these risks. There are some risk events that may or may not occur, while there are events that will occur but the timing of the event is uncertain. Some of us will die young, some of us will live for a long time, while some of us may get seriously ill and survive in the meantime. No matter what way you look at it, these events which may or may not happen can have consequences which need to be protected against.
Accordingly, the conversation with you has to turn to risk. I explain the risks of what may happen in the future and advise you on financial solutions which can mitigate these risks. Alternative options will mitigate these risks to different degrees and that poses a dilemma as to what is the best solution for the client. Furthermore, the recommended solution will be the ‘best fit’ to your circumstances, and sometimes you will choose not to implement the recommended solution. Why? There are other factors at play including affordability and attitude to risk.No two people will have the same view of risk. What is subjectively risky to one will be viewed as less risky to another. Similarly, different individuals have different capacities for risk based on their unique situation or stage in life. Individuals also have different risk tolerance levels and what this means is that for the risk advisor there is no ‘one size fits all’. In fact, there is a unique solution for everyone and as your financial advisor I will find that solution for you.
For some of you worryingly, denial is a method of ignoring risk. In the Celtic Tiger economy of the early 2000’s, property and equities investment/speculation was the activity most associated with peoples actions who denied any acknowledgement of the inherent risks present in those activities. That life-stage ended badly in 2008 and 2009 for many speculators because they did not understand the risks involved.
When it comes to investment risk, there are many possibilities which cause an unwanted event and thus many factors that drive risk as happened at the end of the Celtic Tiger. Here are just some:
Asset class risk, Sector risk, Geographical risk, Fund Manager risk, Interest rate risk, Inflation risk, Currency risk, Economic risk and Political risk.
It is true that all of the above have an impact on investment volatility. Volatility refers to the amount of uncertainty or risk which causes fluctuations in an asset/security’s value. A higher volatility (higher risk) means that a security’s value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility (lower risk) means that a security’s value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.
Regarding protection risk, I encounter many whose attitude is that early death/serious illness or loss of income will not happen (denial) to them and their family and “‘anyways’ the cover is not worth it”! Risk cover does come at a price, and yes actuaries study statistics and price risk cover so that their employer makes a profit margin like any other business.
The most widespread incidence of denial in my experience actually occurs among the business sector. The evidence supports the fact that there is a very low up-take among businesses for Co-Director/Co Partner assurance or Key-man insurance. The instances when it is put in place are generally for the purpose of compliance, i.e. providing the lender with collateral security for the bank debt of the borrowers. This is a high risk strategy which business people engage in, which frankly surprises me.
In Ireland today, the mortality and illness statistics are alarming. Here are just some:
- 1 in 3 people (probability) will get some form of cancer in their lives
- Approximately 40,000 people got some form of cancer in 2019
- This incidence of cancer is twice as likely now than it was in the 1990’s
- In the period 2007 to 2009 in Ireland, the most common cancer illness for women was breast cancer (32%) and prostate (29%) among men.
- The same illnesses were responsible for 15.8% and 11.8% of cancer deaths
- Lung cancer was the single biggest cause of death by cancer at 16.7% and 23.5% for women and men respectively
- The current life expectancy (longevity risk) among Irish men and women is to live to the average age of 75 and 80 respectively
- 2 out of 3 adults in Ireland are obese
- 1 in every 2 smokers will get cancer in their life time
My own personal experiences of life’s risks had one stand out event. This was when my own mother (never having drank alcohol or smoked) was diagnosed with bowel cancer in October 2000 and passed away in December 2000 at the age of just 58. On another occasion in 2012, I lost a friend aged just 44 who was diagnosed with Motor Neurone Disease earlier that year.
Now there are certain actions we can all take as individuals and businesses to reduce our risk, however it is still prudent to put in place plans that protect against the ever present risk which we have no control over. My own view is that it is smart and prudent from both a family and business perspective to have suitable protection in place. To do this requires perseverance in financial planning for peace of mind. My role is to advise you on whatever life-stage you are at and to prepare you for your financial future. Helping to chart your financial future will always be practical rather than utopian. In this way the independent financial advice I provide for your financial plan is grounded in reality, your reality.
Would you like a call to find out how we can help you and your family realise your financial goals?