investment risk Archives

Personal risk management plan – do you have one?

28 September, 202228 September, 2022 Finance

Risk Management Plans don’t only apply to businesses – every person and family should also have a plan to help them cope in the event of an unexpected crisis. No doubt you have insured your car as the risks of damage are obvious to you on a daily basis. You will almost certainly have insured your home and contents against fire, burglary or storms. But what about your greatest asset: your income? Statistics show that as a working adult, earning an average income is worth more than $3.7 million over a 40-year full-time career, assuming no increase in earnings. How would you cope if your family’s primary income earner met with serious illness or accident? Your Risk Management Plan Professional guidance is crucial in establishing your risk management plan. You need to consider the extent of your financial commitments and review what assistance may already be in place. This may include insurance cover within your superannuation, employer protection, existing insurance policies or other sources. Fortunately, a range of insurance policies are available to cover the risks you confront. These include: Loss of Life or Total & Permanent Disablement. By including this in your superannuation it is effectively a tax deduction as your superannuation comes from pre-tax income. Income protection. A critically important cover for income earners. It will provide you with income in the event of sickness or accident for a predefined period. If you are a small business operator you can include the costs of operating your business while you are incapacitated. The premiums are a tax deduction. Trauma insurance. This is sometimes referred to as critical illness insurance and provides for a lump sum in the event of suffering a specific injury or illness. It is ideal for a non-income earning partner who may not qualify for income protection. Child Trauma insurance. Many families are devastated when a child is struck with a critical illness. This may mean one or both parents having to give up work while the child undergoes lengthy treatment. Some companies are now providing specific policies to assist the family in such a catastrophe. A licensed financial adviser will be able to help you prepare a Risk Management Plan… just in case. The information provided in this article is general in nature only and does not constitute personal financial advice.

Investing: How to reduce concentration risk

27 October, 202127 October, 2021 Investing

Concentration risk. No, it’s nothing to do with thinking too hard about something. In fact, it’s more likely to be a result of not paying enough attention. Concentration risk is the increase in investment risk that comes about from not sufficiently diversifying your portfolio. In other words, too much money is concentrated in too few assets, sectors or geographical markets. This can happen: Intentionally, because you have a strong belief that a particular share or sector, such as resources, banks or property, is likely to outperform in the future. Unintentionally, through asset performance. One or two shares deliver spectacular gains, making the entire portfolio more sensitive to moves in just a couple of assets. Or maybe shares as a whole enjoy a period of strong growth. Even though you hold a large number of different shares, the increased exposure to one asset class increases the risk to your portfolio. Accidentally, through poor asset selection. As at December 2020, nine of the ten top companies that make up the MSCI World Index also appear on the top ten list of the main US index, the S&P 500. Investing in two funds, one that tracks the world market and one that tracks the US market won’t deliver the level of diversification you might expect. Managing your risk The solution to concentration risk is our old friend, diversification. Appreciate the importance of asset allocation, the art of spreading your money across the main asset classes of shares, property, fixed interest and cash. Ensure your asset allocation matches your tolerance to investment risk. Diversify within each asset class. Holding the big four banks is not a diversified share portfolio. If property is your thing, buying four one-bedroom apartments in the same building, or even in the same area, creates a huge concentration risk. Understand each investment and its role in your portfolio. Does share fund A hold similar shares as share fund B? Do they both have the same strategy? Get a professional opinion. Even if you are confident in making your own investment decisions it’s wise to run them by a licensed adviser. It’s surprisingly common for investors to develop an emotional attachment to particular shares or properties they own. Concentration risk can also increase over time due to lack of attention. Your financial planner will assess your portfolio for hidden concentration risk and help you achieve a better balance of investments. The information provided in this article is general in nature only and does not constitute personal financial advice.