Risk is an inherent part of our everyday lives. Even the simplest decisions we make, whether personal or professional, are fraught with multiple risks. Hence, in one way or the other, we are all risk managers by default. If we had to define risk in plain terms, there would be the possibility of an unwanted outcome. Risk management helps to mitigate and control these undesirable outcomes with the use of advance planning.
In the modern world, risk and its management feature prominently in the domain of financial investment, making it necessary for consumers to understand the salient nature of risk in this area.
Financial Investment Risk Management
Investing money has forever been a risky business. There is always the possibility of adverse outcomes and this can be due to myriad permutations and combinations. The health of the financial world is dependent on market forces and external factors like climate disasters, public health crisis, political crisis and much more. Hence, many people prefer to err on the side of caution while investing their hard-earned money. For consumers, proper risk management in financial investment hinges on asking prudent questions with the aim of reducing the overall risk of one’s portfolio. People often rely on gut instinct rather than performance and other trends, when investing money. This is never a good idea because the security of the money you are investing is of utmost importance.
In addition to understanding relevant risks, consumers should also be aware of the steps involved in assessing and managing those risks.
# Defining your goals and identifying risks: An individual must clearly define his personal goals, and what would constitute a positive outcome for them. Having a clear set of goals is vital to being able to correctly identify all potential risks. To identify these risks, consider not just the present condition but also potential future scenarios. Never underestimate any probable high-impact event; even if it seems unlikely to happen.
# Analyzing risk and developing a mitigation plan: One of the guiding principles in risk management is to consider all worst-case scenarios. This is somewhat contrary to our social set up where it may be considered inauspicious to talk about negative outcomes or “bad news”. However, unless we know the worst that can happen, we cannot plan anything to prevent it from happening at all. It is extremely important to have a back-up plan for future risk scenarios in case they eventually materialise.
# Enhancing decision-making skills: The most critical aspect of risk management is the execution of effective risk management actions. While one may not be able to avoid every potential risk, time and attention need to be focused on possible ways to minimise the impact. It is important to remember that there may not always be time to plan for threats that emerge unexpectedly, so it is essential to develop your decision-making ability, in conjunction with risk thinking, to be able to be resilient and adapt agilely to a developing situation.
These steps are key to successfully navigating risks. During times of uncertainty when the situation is fluid and dynamic, it can be very difficult to predict future developments and plan for everything in advance. But this does not mean that one should not, or cannot, plan for risks at all. Having a plan that takes into account all possible scenarios and the necessary courses of action makes it easier to adapt to any sudden changes in the landscape. Greater risk awareness and informed decision making can help in developing a financial risk mitigation plan which is more responsive to shifting trends.
The Covid-19 pandemic has jolted world order and upturned normalcy in every sphere. Financial markets have been in turmoil and jobs are in upheaval, causing uncertainty to percolate into our personal lives as well. If we are to be better prepared for these kinds of shocks in the future, inculcating a risk management focus is crucial in our personal as well as professional lives. This pandemic should always serve as a reminder that while crises can often be out of our control, being caught completely off guard is a choice we make ourselves.
By Hersh Shah, CEO, India Affiliate of Institute of Risk Management (UK)
