This planning process is risk management. The main purpose of personal risk management is to protect goals, dreams, treasure and personal well-being from “what ifs” in life. We can't manage risk without information. Every decision we make involves risk.
The quality of our risk management is determined by our ability to anticipate future events. Risk management is, therefore, a vital tool for supporting high-quality decision-making. In turn, the ability to anticipate what might happen depends on the quality of the information available at that time. Here's a brief description of each quadrant.
For example, if you never drive while intoxicated or go skydiving or bungee jumping, these risks pose no threat. Once again, certain risks can be avoided. Next, can the risk be reduced? For example, if you eat well, get enough sleep, exercise, avoid unhealthy habits, etc. We also know that smoking causes lung cancer.
Therefore, if we stop smoking, we can reduce the chance of getting lung cancer. The third quadrant, the transfer of risk, includes strategies such as buying insurance or reducing our deductible. By paying a premium, we can transfer all or part of the risk to the insurance company. Finally, for those risks that cannot be avoided, reduced or transferred, we have no option but to retain them.
You should never spend a lot of money to manage a risk that has minimal consequences. In fact, it may be best to ignore risks that fall into category one. I couldn't achieve my main objective if I didn't manage the multitude of smaller-scale risks as a springboard. The vertical axis measures the probability of the risk occurring and the horizontal axis measures the severity of the risk.
In order to make the process more objective, risk management identification and evaluations require the best available inputs and analysis. This means that, in addition to being sensitive to what could go wrong, risk management is also about maximizing the opportunities for obtaining beneficial results. To protect against unexpected financial difficulties, risks must be identified, commercial and non-market solutions considered, and a plan developed and implemented. Liability risk refers to the possibility that a person or other entity may be held legally responsible for the financial costs of property damage or physical injuries.
Nihad has been working in providing technical assistance in public financial management reforms for more than 12 years in the EU and the Caucasus region, focusing on auditing and accounting. However, it is important to develop a comprehensive understanding of risk management before analyzing the risks associated with investing. There is no generic approach to risk management that works equally well for everyone. Therefore, risk analysis in practice involves recognizing small risks that sometimes cannot be measured, monitoring larger risks that can be evaluated, and thoroughly understanding the trade-offs.
Therefore, we will begin with a full description of general risk management and continue with the identification and control of the specific risks associated with investing. Longevity risk is the risk of reaching an age when a person's income and financial assets are insufficient to provide adequate support. Risk analysis is, in essence, a form of structured thinking developed to help deal with the many risks that human beings live with every day.