Wednesday, April 11, 2012

FINEX Gym Session 3: Risk Management


FINEX Gym Sessions are regular gatherings of individuals hugely passionate about learning how to manage their own finances through sharing by invited experts and the participants themselves. It is by invitation only! Hence, if you are interested, drop me a message, and I will invite you to the next session!

Blog Post of the FINEX Gym Session

Wow! Sounds like it is either going to be a really scary or a really dry topic huh?!

Why Scary?
Risk Management is by definition, the Identification, Assessment and Prioritization of risks. In layman terms, it is about the management of uncertainties, and to put it into financial context, it would be the management of our financial uncertainties.
And that would certainly be a scary thing to do, because many of us simply hate uncertainties, not to mention managing it!

Yet, it is very much a truly important activity which we ought to do or at least be involved in, on a regular basis.

Identification
In Financial Risk Management, every individual ought to first ask themselves these few questions (Not exhaustive):
  1. What is my risk appetite? – Relates to your personal comfort with potential losses.
  2. What are my current and potential liabilities?
  3. What are the current and potential liabilities of my family?

These few basic questions would help us realize that it is important to identify the financial risks in our life, so to be adequately prepared for them.
However, it is important to note that financial risk management is often found done not for yourself, but for the people around you; for the people you love. Especially so, if you are an important financial provider in your family, where the absence of your income could make financial burdens derived by the family liabilities and lifestyle unbearable, leading to downsizing or other financial hardships.

Assessment
To assess a risk, we have to estimate the likelihood and impact of each “risk event”.
For the likelihood of a risk event, “Age” would likely be a major factor among others. This is because the likelihood of an aged man falling ill would normally be higher than a youth, and hence the greater the likelihood of potential shortfall in income to support the liabilities and daily needs of the family.
For the impact of risk events, it may be contributed by many factors, such as the number of dependants, the amount of financial liabilities, or even the lifestyle of the individual/family which determines their daily needs, etc.

Thus, from the looks of it, we will realize that risk assessment varies from individual to individual. And hence, it is truly important for us all to take time to assess our individual risks, or even seek out a reliable financial advisor to help us gain better perspectives of these risks.
Nevertheless, at the end of the day, it is critically important to note that we should always be actively involved in assessing our own risks and to be firm in making our own decisions after consulting our financial advisors; simply because we are the best masters of our own fears and uncertainties, and that there are certain confidential information that we might not wish to share with our advisers that may lead to improper estimations.

Prioritization
Some may ask, “Why is it important to prioritize?”
Well simple. It’s because there are just too many things we want in life! And we just can’t afford to have them all! Simply due to scarcity, we have to decide:
  1. What are our wants and what are our needs?
  2. How much to spent, how much to save and how much to invest?
  3. What does wealth means to me? What does success means to me? What will allow me to attain self-actualization?
  4. For each aspiration, what is my time allowance to achieve it? Besides time, how much will it cost? And hence, which is more feasible to strive for?

These are important questions to be answered, so to lead you in making decisions that will determine the life you want to live.

Questions asked and answered in the Gym

  1. Difference between Limited Pay, Investment linked and Term Plans


Cash Value
Premium Holiday
Cost
Linked to investment
Limited Pay
Yes
Yes

Yes
Investment Linked
Yes
Yes

Yes – Get to select investment fund
Term
No
No
Generally cheapest
No


  1. Should we just buy term and invest the rest instead of buying an investment linked product?

Investing ourselves would be a better option for those who are:
i.                     Disciplined to save and invest regularly
ii.                   Knowledgeable and ability to make rational investment decisions as oppose to gambling
iii.                  Have the risk appetite to invest

However, if you do not have the time, ability or risk appetite to invest by yourself, it would be a better option to consider an investment linked plan.

  1.  What are the qualities of a Financial Advisor we should look out for?

i.                     Takes effort to understand your needs and risk appetite.
ii.                   Educates you on your “financial needs” and “liabilities”, without scaring you to buy their products.
iii.                  Knowledge of the products they are selling; such as the portfolio held by the investment linked plans or the real underlying costs behind each product, etc.


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