Financial Risk Management

Let's assume that you are an individual who has managed to stay in control of your finances. You are not in overwhelming debt, you have a good credit history, and you make enough income to have a little extra to put away for retirement, and now you want to start planning for a future that will be perfectly suited to your unique needs and desires. Where do you start? The first place to start would be to sit down and assess your long term financial goals. If possible, it would be wise to do so with the help of a professional financial planner, who can help you determine your current financial health and map out an investment strategy that best suits your needs.

Most banks and investment houses offer the services of a financial planner, but you can also do some research and hire one that is to your liking. Your planner will help you determine your goals, whether you'd like to retire early, or how much money you'd like to ideally have when you do retire, and so it is to your benefit to choose a good one. Some criteria to look for in a good financial planner include past performance, reasonable commission rates, and neutral bias- in other words, they are not just sales reps for a specific company, and that they have your best interests in mind. Also, you may want to stay away from financial planners that advocate all the latest fads in order to make a maximum return in the minimum time- try to find a more disciplined planner who has an eye on the long term.

Your financial planner will generally run you through a questionnaire designed to develop your financial profile- a guide that will help you establish the correct investment strategy given your risk tolerance, how much time you have to allow your investments to mature, and your financial situation.

Risk refers to any factor that can affect an investment's potential for growth. As a general rule of thumb, the higher the risk, the higher the potential rate of return, but also the higher the chance of losing some or all of your money. By the same token, the lower the risk, the safer your money is, but you will not see as high a rate of return on your investment. Your risk tolerance is simply an index of what percentage of high-risk investments you are willing to accommodate in your investment portfolio.

The amount of time you have to allow your investments to mature will depend of course on your age, and also on when you intend to start withdrawing money from your investment fund. If you are 18 years old, you might reasonably expect to work until age 50, and then enjoy an early retirement based on the wise investing of the intervening 32 years. On the other hand, if you are already 40 years old before you begin to invest for the future, you might have to wait until you are 60 or 65 before you will be able to retire on the strength of your investments, in which case you still have a respectable 20 or 25 years for your investments to grow.

Your financial situation will determine how much money you have available to invest. Your financial planner may help you draw up a budget of your income versus your expenses, and from the remainder determine the amount of disposable income you have available to you. From there it is a simple matter to decide what percentage of that disposable income you wish to budget for investment. A good percentage might be up to ten percent of your total income. Based on these three factors, your financial planner will lay out a strategy for you. If you are young your investment portfolio will likely be more heavily weighted with higher risk investments, since you have more time to allow them to pay off, and recover if they do not. The older you are, the more "safe" your portfolio will need to be, with emphasis on low-risk, low-return investments such as GIC's, Guaranteed Income Certificates, and the like.

Also, your financial planner will advise you to diversify your portfolio, as this will give you a variety of eggs in a variety of baskets, so to speak. As mentioned earlier, your financial profile will help determine the right mix of high-risk/low-risk investments for your portfolio.

Of course, you should not leave your investment portfolio entirely in the hands of your financial planner. You should remain abreast of current financial trends and happenings, and be able to work with your financial planner in determining what moves to make in the managing of your investments so that you may enjoy an optimum future for you that involves living the life you want to live.

So what are you waiting for? Start now!