As Certified Financial Planners (CFPs ®), we, at Punta Gorda Financial Planning, know that one of the key components of a sound financial future is the analysis and evaluation of risk exposures for our clients. We accomplish this for investment portfolios through a discussion of clients’ long term goals and the completion of our Investment Risk Tolerance Questionnaire. This questionnaire helps us determine the level of comfort clients have with various investment opportunities in relation to the volatility and potential degree of gains or losses of each strategy. We are then able to put into place the best portfolio allocation in light of the goals and attached risks.
However, a proper financial plan means we also need to take a look at other areas of our clients’ lives that are impacted by risks. A “risk” is really the possibility or chance that some event will occur or not. Some risks can result in either a positive or a negative, a gain or a loss. Investing is such a situation. A portfolio may go up or down depending on the outcome. Other risks entail only the possibility of a loss, such as a lightening strike resulting in a fire at your house.
What Is Mitigation?
Mitigation means to reduce the severity, seriousness, or pain of an event. In other words, risk mitigation would require us to take some actions now, before an event happens, to lower the probability or severity of the damage. The easiest thing to do would be avoid the loss if at all possible. For example, when a lightening storm approaches, it is not wise to stand under a tree. We can avoid being struck by going indoors.
Some losses are simply unavoidable. Another way to mitigate risk is by transferring that risk to someone else. For instance, most of us will have at least one car accident in our lifetimes. We try our best to avoid them through proper driving skills and practices, but they do happen. The way we transfer the loss is through car insurance. We pay a small premium to an auto insurance company so that if a large loss occurs, we are not hit with a catastrophic expense that we may be unable to afford. The risk of loss is thus transferred to the insurance company.
We are all familiar with the many types of insurance such as auto, home, property, disability, and life insurance. All are a means to offload the risk of severe damage to our assets or an income loss onto the insurance company. Because every person’s financial situation is different, the insurance industry has continued to meet the needs of consumers with very flexible products.
For example, whole life insurance was generally the only type of life insurance available a generation ago. Now, many type are on the market, such as affordable term policies, universal life policies that enable easy modification of premium payments, and variable life policies that allow investment into equity and bond sub accounts for policy growth. These policies offer many different approaches for people to best align their risk to the solution.
Of course with flexibility comes some complexity. Transferring risk sometimes has other considerations attached. For example, the payment of a settlement or benefit may have income tax ramifications. In addition, cancellation of some policies that have grown in cash value may cause a taxable event. However, most of these consequences can be known up front and considered in the buying decision.
Choose Punta Gorda Financial Planning to Help You Avoid or Transfer These Risks
At Punta Gorda Financial Planning, we can help you evaluate the current and future risks faced by your family. We can discuss with you the most beneficial ways to avoid or transfer these risks. In addition, we can help you navigate through the many options available and explain to you the many other considerations on taxes, estates, and future asset values.
Please give us a call or contact us online to help you begin the financial planning process for effective risk mitigation.
Written by Thomas M. Geier, CPA, CFP®, PFS.
My aim is to offer clarity to your finances. I specialize in helping individuals and families determine what is most important in their financial lives, identify short and long-term goals, and make great choices for achieving comfort, security, and peace of mind.
I graduated from Loyola University in Baltimore, Maryland, and have been a Vice President of our investment management affiliate, Geier Asset Management, Inc, since its founding in 1999. I have over 25 years' experience in financial planning and investment management and am licensed as a Certified Financial Planner® professional, a CPA, and Personal Financial Specialist. I am member of the Personal Financial Planning section of the American Institute of CPS's and Florida Chapter of the Financial Planning Association.