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Understanding Risk Management

When it comes to money, we tend to take far more risks than we do with other aspects in our lives. For many of us, we take money for granted, we have jobs, we have been there for five, ten, maybe even fifteen years, and it becomes a part of the routine. Bills come in, bills get paid, mortgage is due, go online and process—it is a monthly circle.

The challenge with risk; we never truly understand what it means and where it will hurt us. Think about driving your car. You are surrounded by risk, the lady talking on the phone next to you, the guy having an argument with his spouse behind you, the bus driver who did not sleep well the night before. Yet, we have too many other issues to deal with, our brains are already dealing with what needs to get done today, oh, and by the way, don’t forget to pick up Joey after school! Our brains protect us from risk, because if we stop right now, and truly think about every risk around us, we would be hiding in a shell. But risk is a serious issue, and one we should not take lightly when it comes to our financial futures.

A recent survey showed only 23% of Americans have emergency funds to sustain them for six months. Actually it is much worse, because if we dig deeper, Money Magazine stated the 23% only pertains to people who lose one job, not if both parties lose their jobs; then we fall to 6%! Add to this the growing number of people with no savings, 32%, and suddenly a serious financial crisis is at hand. There is some good news buried in here, 18-30 year olds had a higher rate of savings, 32% had enough in savings to survive a six month dry well.

How about retirement? Scary word, retirement. Everyone looks forward to it, but most are terrified of it. Our fear stems from money. How will we pay the bills? Will we have enough to enjoy it, or will we be eating top ramen? How about medical? Let’s face it, the unknown is what is truly petrifying, we just do not know the future. Before we run to the streets screaming, how about a dose of reality. The graph below shows the average savings for retirement as of 2013:

See, you might be right in the average, but does this average really give you the ability to retire as comfortably as you would like? Second, if this money is not being managed well, what risks are you taking where this money could be halved if the market was to suffer another downturn?

The Motley Fool recently stated one of the bigger issues facing American investors today is relying on cloud based robo-investment tools and moving away from money managers and advisers. Recently Portfolio Strategies released a blog about robo-investment tools such as Acorn and their importance in teaching us how to save, even if it is a dollar here, and five over there. But, robo-investments are not able to assess your true risk potentials, they do not know you, they do not understand your lifestyle or if you have kids in college or medical issues. They are a massive application aimed at forced savings, not a true understanding of how those savings affect you.

Risk management is more than socking your money into a mutual fund, or buying Facebook stock, or even taking it all and betting on red, it is about understanding your needs. Each of us, depending on age and circumstances can afford only so much risk. The younger you are the more risk you might be able to accept, unless you have an illness or other debilitating disease which calls for a greater dependency on medical which in turn leads to greater medical bills.

Professional money management and advisers are more than counselors of your funds; they are highly trained, educated, and certified individuals who understand the potential of risk. Companies like Portfolio Strategies not only understand risk, they are watching and observing the markets, trends and other world news which can affect your retirement. Walk into most money manager or adviser’s offices and you will find monitors showing the latest stock news, but also many are watching CNN or other 24 hour news channels. It is about being informed, and understanding what it means to their clients when world events take place. Professionals take the time to fully comprehend your retirement desires, how you want to fund your child’s education, and even how you want to fulfill charitable goals.

Risk management is more than putting money away for a disaster, it is about understanding and seeing the sleepy bus driver two lanes over, it is about dealing with risk ahead of time, so when the bus driver swerves, you have open space to the right. Professionals can help assess financial risk, and provide the guidance needed for financial health.

There are never guarantees, but someone who truly understands your financial needs and fears can take the edge off the fear and provide a level of protection a robo-investment never will.