Financial risk management strategies is a process assessing, managing, and mitigating losses. This process is used by large corporations as well as financial planners to potentially minimize risk. One very important feature of financial risk management is to reduce the degree of uncertainty in investment decisions. Fund managers for large institutional investors or university endowments quantify the potential for losses as a result of investment strategies. Financial risk management strategies are connected to the concept of return on investment. For example, the degree of risk for a U.S. T-bill is close to zero while the risk for emerging-market equities is very high. The goal, of course, for fund managers and financial planners is to minimize risk as much as possible.
Investment Management
Investment management refers to the management of investments offered by financial professionals and other financial institutions such as investment banks and university endowments. The goal of asset management is to increase a client’s assets over time while managing risk. Asset management utilizes both fundamental and technical analysis. Asset managers may use fundamental analysis to study anything that can impact an asset’s value. For example, any economic or political news can have an impact on the value of a security or asset. Technical analysis, on the other hand, relies on previous price and volume. In other words, asset managers may look at historical data, along with mathematical patterns, known as technical indicators, to fine tune their investment entry and exit points. Investment management services include asset selection and allocation, portfolio strategy, investment monitoring, as well as portfolio analysis.
Retirement Advice
Before I offer specific retirement advice, let me repeat a mantra that I tell all my clients: The earlier you prepare for retirement, the better off you will be. Retirement often creeps up on us and we find ourselves saying, “where did all the years ago.” Below are, in my opinion, some concrete steps you can take:
- Monitor your investments prior to retirement and avoid overspending.
- It’s prudent to consider inflation as an inevitable fact of life. When planning for retirement, it’s advisable to plan for inflation as part of your strategy.
- While this is not an easy conversation to have, you need to talk with your spouse or significant other about retirement spending. During pre-retirement, it is critical that you both need to cut out any unnecessary spending.
- Not everything about a retirement planning advisor is about money. You need to focus on your physical health. As we get older, our physical health declines, which increases health costs. If you want to avoid sudden health costs that can potentially undermine your retirement planning, make sure you take care of your health.
- Create a budget and stick with it.
- Most importantly is that you need to sit down with a qualified and experienced professional advisor who can help you become fiscally healthy.
- Watch travel expenses during retirement. Many people dream of traveling when they retire, but that only eats away at your retirement goals. It is best to do much of your travelling prior to retirement.
- If you can work longer, you will increase your chances of having a more comfortable retirement. For example, people who retire at 70 years will get a larger Social security check than those who retire at age 66. That’s extra money for life in your pocket.
Retirement Investment Strategy
Regardless of your investment strategy, the goal is to find the right balance between investment risk and return on investment. Below are some of the retirement investment strategies you can use to prepare for your retirement:
- Contribute the maximum allowable amount to your 401(k). If you have an employer-sponsored retirement plan, you should take advantage and contribute as much as you can up to the company match.
- Open an IRA or Roth IRA. If your company does not offer a 401(k) plan, you can always open an individual retirement account through a bank or brokerage firm. IRAs offer many of the same benefits as a 401(k) plan, including tax deductible contributions and tax-free growth.
- You should always be mindful of your risk tolerance and asset allocation. You see, risk tolerance is connected to asset allocation. Let’s say you have a lower risk tolerance. In this case, you may want to lower your allocation in stocks, as they tend to be risky.
- Be aware of retirement fund fees. If you are having a qualified financial advisor manage your investments, make sure you understand the fee structure. Some advisors charge a percentage of your overall investment, while others may charge you a flat fee.
Another retirement investment strategy to consider is incorporating a multi-asset class model as opposed to the traditional 60/40 portfolio. The 60/40 portfolio means that you allocate 60% of your money to stocks and 40% to bonds. For many years, this approach worked quite well, offering investors consistent returns while managing risk. The 60/40 strategy operates on the mathematical principle of negative correlation. In other words, if stock values drop, bond yields would rise to protect your investment and vice versa. A multi-asset class strategy, like my REALM model, potentially offers consistent returns while potentially managing risk.
The REALM strategy contains Alternative Investments which are speculative by nature and have various risks including possible lack of liquidity, lack of control, changes in business conditions and devaluation based on the investment, the economy and or regulatory changes. As a result, the values of alternative investments do fluctuate resulting in the value at sale being more or less than the original price paid if a liquid market for the securities is found. Alternative investments are not appropriate for all investors. No investment process is free of risk, no strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There is no guarantee that this investment model/process will be profitable. Diversification does not guarantee profit nor is it guaranteed to prevent losses.
Multi-Asset Class Strategy
Multi-asset investment strategies have become popular over the past several years. A multi-asset strategy utilizes alternative investments, which are different from the traditional asset classes of stocks, bonds, and cash. Some of these alternative asset classes include real estate, hedge funds, business development corporations, ETFs, annuities, and others.
The main benefit of a multi-asset class model is that it potentially helps manage risk much more effectively than the 60/40 portfolio. You see, the 60/40 operates on the principle of negative correlation. In other words, if stock prices went down, bond yields should move up to offset your losses.
In contrast, my REALM model utilizes alternative assets that are either not correlated to the stock market, or have low to moderate correlation. This could result in potentially better risk management. Another benefit of The REALM® Model is its flexibility and customizability. It is flexible in the sense that I can add other alternative assets once they become available to my clients. It is customizable in the sense that I do not use a “one size fits all” approach.
The REALM strategy contains Alternative Investments which are speculative by nature and have various risks including possible lack of liquidity, lack of control, changes in business conditions and devaluation based on the investment, the economy and or regulatory changes. As a result, the values of alternative investments do fluctuate resulting in the value at sale being more or less than the original price paid if a liquid market for the securities is found. Alternative investments are not appropriate for all investors. No investment process is free of risk, no strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There is no guarantee that this investment model/process will be profitable. Diversification does not guarantee profit nor is it guaranteed to prevent losses.
