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Managing Your Risk

“Take calculated risks. That is different from being rash.”

– George S Patten (U.S General 1885 – 1945)

The concept of investing always carries an element of risk; the idea is not to eliminate risk, but rather to manage it.

When building your investment portfolio it is just as important to be aware of the risks involved as it is to be aware of the potential rewards. There is, quite obviously, little sense in building your wealth to only then lose it all due to a lack of effective risk management.

Your Equiti adviser, through the process of financial planning, aims to manage your risk and to achieve two fundamental objectives; that is:

1. Protecting Your Wealth, and

2. Protecting You.

When it comes to managing risk, it’s a matter of protecting yourself, your family and your financial stability against loss.

About Your Tolerance For Risk

Dealing with investment risk is the most fundamental part of an investment strategy. In an ideal world, it would be possible to achieve your objectives without taking any risk at all. In practice, risk is present in every investment decision. It is, therefore, important that you have an understanding of risk.

There are two approaches to establishing the ‘right’ level of risk for you.

The traditional approach to financial planning begins with determining how much risk you are comfortable with and then creating an investment portfolio based on your level of risk ‘tolerance’. The results of a risk profiling questionnaire will often determine your tolerance for risk, which in turn determines your investment portfolio, which in turn determines the potential investment returns that can be achieved.

In other words, the traditional approach to risk management gives you what you think you want, and not necessarily what you need to achieve your goals and dreams.

An alternative approach is to determine what degree of risk is required to achieve your financial objectives (i.e. your goals and dreams) and to then create the investment portfolio necessary to give you the greatest possibility of achieving those objectives.

Taking what may appear to be the ‘low risk’ approach, i.e. relying on the interest from bank deposits or other ‘safe’ investments, may mean that you are likely never going to even have the possibility of achieving your goals.

In certain cases a more dynamic approach is therefore required.

Private wealth management is an improved way of financial planning that is specifically designed to help you achieve your long-term goals reliably. The key focus is on the returns needed to help you to achieve your goals.

Private wealth management starts and ends with you and your financial goals and dreams. It then helps to ensure the achievement of those goals.

1. Protecting Your Wealth

Taking some time to plan your strategy before you start investing can mean the difference between achieving your goals and simply aspiring towards them.

Having a clear idea of your investment objectives, timeframe and attitude to risk provides a solid basis on which to build your investment portfolio and the more specific you are, the better your chances of success.

Diversification simply means spreading your money across different investments to reduce risk and it can help preserve your capital, increase the liquidity of your investments and to decrease the effects of volatility.

It is perhaps one of the most important of all investment disciplines; that’s why ‘don’t put all your eggs in the one basket’ has become the world’s most used and most valuable pieces of investment advice.

How you allocate your money to each asset class is one of the most important decisions you can make when constructing your investment portfolio from a risk management perspective.

Asset allocation may sound very similar to diversification. Indeed, the principles are closely related; both are designed to reduce risk in your portfolio.

Diversification means spreading money among several different investments.

Asset allocation takes this principle one step further by diversifying your portfolio not just among different investments, but among different investment asset classes: i.e. cash, Australian shares, International shares and property assets.

Asset allocation does not eliminate risk, but it can reduce your exposure to extreme highs and lows in performance.

Our business is built on our ability to identify, assess and select the investment strategy that is most likely going to work best within certain financial parameters and then implementing those investment recommendations for our clients.

You Equiti adviser can help you to protect your assets by helping you to determine the asset allocation that will most suit your individual needs and objectives.


2. Protecting You

Your biggest asset is YOU and YOUR ability to generate an income.

Risk insurance is designed to protect you from the unexpected and it plays an important role in long term wealth management. Ensuring that you have the right amount of insurance cover is important so that your loved ones are not adversely affected at a time when they most need support.

There are a number of key insurance areas where your Equiti adviser is able to provide assistance.

The various types of risk insurance policies may be categorised into:

Term Life Insurance

Term Life pays a lump sum payment upon the death of the life insured and is designed to provide protection and financial stability to their loved ones.
In the event of the person’s death, the lump sum will assist in paying off any outstanding debts such as a mortgage and removing any additional financial pressures. An adequate level of term life insurance should provide an excess amount over debts to ensure that family members may be adequately provided for.

Total and Permanent Disablement Insurance (TPD)

Since money is the last thing that you would want to be thinking about when facing a permanent disability, an option with Term Life Insurance is to take an extension of Total and Permanent Disablement Insurance (TPD).

TPD insurance provides a lump sum payment in the event of the life insured becoming totally and permanently disabled and likewise may be used to ensure that family members are not financially burdened in the event that their primary income producer is no longer able to provide for them

Trauma Insurance

After a major trauma, the only thing you should be focusing on is your recovery. Trauma policies pay a lump sum in the event of an injury or sickness (e.g. cancer, heart attack, stroke).

Trauma insurance can be taken as a stand alone policy or may also be attached to a Term Life insurance policy.

Income Protection

Your most valuable asset is the ability to produce an income and this must be protected.

As one of the most crucial risk management insurance products, an Income Protection policy is designed to replace an income stream if the insured is unable to work due to sickness or injury.

There are basic policies, which might be limiting in the time of a claim, and then there are extended, or plus policies which are preferred.

Income Protection is an extremely flexible policy, you choose the waiting period (how long you must be unable to work before the insurance begins to pay) and you choose the benefit period (how long the policy will pay you if you are unable to work).

Income protection cover can be tailored to cover you and your specific needs.With so many risk insurance products on the market and with no corporate affiliations to a specific insurance company, your Equiti adviser can access the entire Australian risk insurance market and help you to source the most appropriate policy for you.

The Cambridge dictionary defines risk as “the possibility of something bad happening”,Warren Buffet defines it as simply as “not knowing what you are doing” and many investors define it by simply asking the question, “What are the chances of losing my money?”

We believe that managing your risk is about making educated and informed decisions.