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Striking the Balance Between Risk and Rewards

Risk is everywhere.  By simply owning a house, you put yourself at risk.  What if someone gets injured on your property?  We mitigate risks like these through homeowners insurance.  We protect our car and ourselves while driving with auto insurance.  So what do we do about our investments and our financial future?  How do you protect against a market decline?

The CFP Board recommends three key points that you should take into account when considering whether to invest at a certain level in return for a certain level of rewards:

  1. Avoid Certain Risks – Some unnecessary risks can be avoided with proper precautions. By staying out of risky investments, you are putting yourself in a safe position. For example, you might want to consider putting your cash in fixed deposits instead of investing it in the stock market when the market is facing a recession. Even here there is risk – the risk you will miss the opportunistic timing of entering the market when investments are “cheap.”  Determining the right direction can be difficult, so it’s always best to get proper advice and make the decision that will protect your finances.
  2. Reduce Exposure to Risk – The best way to reduce exposure is to diversify your investments and assets. Do not throw all your hard-earned cash into property or the stock market, but try to find a balance between the different types of investments available. Invest in foreign currencies, gold, or in a trusted mutual fund. By diversifying, you are putting your finances in a strategic position – if one of your investments fails, you will have others to cover up the losses.
  3. Get the Right Insurance Coverage – Even though it can be costly, almost everyone, even the professionals, get insurance to cover their assets and investments. In today’s turbulent times, it is even more essential to get the appropriate insurance policies to protect your finances, your family, and your future.

Below are a few guidelines to assist you in making insurance purchasing decisions.

  • Insure assets that are important to you – Make a list of your assets and investments. Separate the things you cannot afford to lose or will take a long time to regain into another list.  Usually, what comes in at the top of this list includes spouses, parents, children, cars, houses, businesses, and certain investments. Be sure to insure only the things that are essential. Insurance policies are not cheap and, therefore, you should plan them carefully.
  • The main objective of insurance – Insurance companies nowadays have a lot of packages and promotions up their sleeves. When you decide to call an agent to purchase a simple coverage policy, they will entice you with savings plans and investment plans. You must always remember you need insurance to protect your assets, not to add to them.
  • Keeping insurance cost at the minimum – By having good habits like not smoking, having a safe job, and installing security hardware on your properties, you can massively reduce policy premiums. Always look at areas where you can lower your policy payments. If you are unsure, ask your agent for help.

All in all, when it comes to striking a balance between risk and reward, keep the three golden rules in mind. For a better financial future, always avoid unnecessary risks, reduce your exposure to risk, and get insurance coverage for areas of high risks.

Source: Balancing Personal Financial Risks and Rewards