Making Sure Your Family Is Okay

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Making Sure Your Family Is Okay

When you have kids, it can be easy to think of the here and now and forget about the future. After all, since those diapers and messy rooms are happening in real time, it isn't always easy to hunker down and go over long term financial goals. However, making sure that your family is financially viable can help your kids to feel safe and secure for the long haul. I have been a financial planner for several years, and you wouldn't believe what a big difference a little planning can make. If you want to make a difference, go through my blog and learn how to save a little money.

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What Is A Risk Profile In Financial Planning?

Whenever a professional conducts a financial planning consultation, one of the central issues is the client's risk profile. You might wonder what a risk profile is. Here are 5 things clients should know about risk profiles.

Risk Premium

Foremost, you should understand the relationship between risk and value. Generally, higher risks are associated with better financial returns when things pay off. Conversely, a higher risk also comes with a greater chance that everything goes to zero. In other words, risky investments tend to have higher profit ceilings but lower floors. The positive value is the risk premium

Discounting Risk

Your goal in developing your risk profile is to maximize returns while minimizing potential adverse outcomes. People who invest in real estate development, for example, have to account for the risk that projects might fail to attract sufficient returns even if the work goes well. The same logic applies to investing in stocks, bonds, cryptocurrencies, options, commodities, and many other assets.

How do you strike the right balance? One approach is to seek discounted risk. A financial planning practice will encourage you to look at the potential buy-in price of an investment relative to its expected value. Once you see a price that you like, you should then demand a discount to account for the risk potential.

Many financial planners use time-based formulas to discount clients' risks. The longer the client has to stay in the investment, the greater the risk discount should be.

Appetite and Tolerance for Risk

Everyone takes the hit from a financial failure differently. It is important for a financial planning consultation to include a discussion of your appetite and tolerance for risk. Everybody wants big returns, but how comfortable are you going to be if a specific investment implodes?

Insurable Risk

Sometimes you can insure your risk. In some cases, it literally amounts to buying an insurance policy. If you purchase a house as a rental property, for example, you're probably going to insure it.

There are also quasi-insurance products, especially when it comes to investing in securities. For example, some people use out-of-the-money options to insure their risk in stocks or commodities.

Risk Allocation

Your risk profile will change over time. Someone approaching retirement probably doesn't want significant risk exposure. They may focus on historically steadier financial plans involving things like bonds and real estate. Conversely, a younger person's financial plan may integrate more aggressive positions to try to achieve greater returns for higher risk premiums.

Reach out to a company like First Investment Corporation to find out more.