Wealth Building

11 Exciting Ways To Manage Risk When Wealth Building7 min read

Reading Time: 5 minutes Can’t sleep at night thinking about losing money? Be an advanced investor to avoid the potholes of financial ruins as you master the skill to manage risk when wealth building.

August 8, 2020 5 min read
Wealth Building

11 Exciting Ways To Manage Risk When Wealth Building7 min read

Reading Time: 5 minutes

Wealth building is the process of engaging in multiple long-term income sources such as investments, savings, or income-generating assets. Only individuals who plan ahead of time with the right approach can ensure financial success to maintain a healthy standard of living in the future. Understanding, analyzing, and figuring out how to manage risks of building wealth is the key factor to avoid making imprudent decisions that can lead to the possibility of enhanced financial disaster. Be it corporate or personal finances, risk management has an important part to play in your life for the greater good in the long run.

Why Risk Management is Important

With a more holistic view, how to manage risk is not entirely about reducing or avoiding losses. It is an active dance in embracing your risks to accomplish financial goals with an acceptable chance of failure. The importance of how to manage risk for corporate or personal finances are laid down below:  

  • Prepares yourself for unpredictable events can quantify the impacts of failure in advance.
  • Safeguards your family from financial hardships in cases of unexpected casualties or medical emergencies.
  • Protects your financial standing by not letting your business succumb to critical financial adversity.

5 Types of Risks When Building Wealth

Manage Risks

Empowering yourself with a sound knowledge of the different ways you can manage risk can help you follow the right strategy to make informed decisions. Consequently, you can preserve the lifetime income and assets for yourself and your beloved ones. Investors need to acknowledge different ways to manage risk and how they can disrupt a financial plan.

Market Risk

The most common type of risk perceptible to investors is the one that corresponds to the possibility of decreasing the value of their investment. This usually arises with the investment of a large portion of your portfolio in a single asset overlooking other risks associated with it, such as lack of diversity.

Liquidity Risk

This type of risk stems when you are unable to convert assets to cash to pay without suffering from disastrous fees, capital losses, or waiting times.

Inflation Risk

This type of risk occurs when the cost of goods and services increases with no change in the intrinsic value of that good or service. Your purchasing power will diminish during an inflationary period, and bond payouts are prone to inflation risk due to their fixed interest rates.

Longevity Risk

Investors already retired or nearing retirement are concerned with longevity risk aims to manage risk and net worth by outliving their money. You may have a considerable amount of assets now, but do you know if it would last you long enough to support you throughout the rest of your life?

Interest Rate Risk

This type of risk mostly spikes the fear of bond and debt owners. How to manage risk with interest rates falls in the owners risk when the interest rates fluctuate and subsequently lead to a change of effects on one’s debt repayment.

Now you have a few ideas about the potential to manage risks associated with wealth building. So there have to be some ways of managing risk factors to safeguard your personal and organizational finances without incurring maximum losses, right?

Methods to Manage Risk When Wealth Building

Risks of investments cannot be completely reduced and guarantee a one hundred percent chance of financial success. But a planned approach to diversify and ride the wave to manage risk can lead to higher business returns and greater improved wealth building. Before going into manage risk on investment choices, get yourself accustomed with the different strategies of how to manage risk below.

Diversify Investments

Diversify Investments

Do not limit your investments to the same risk correlations all the way across your portfolio. Rather, diversity your investments across a range of stable sectors. Building an expanded portfolio consisting of debt, equity, mutual funds, real estate, and other types of assets can help you manage risk to prevent big investment losses.

Split Investments

Allocating your investments in mixed assets leads to a lower likelihood of wealth loss all at a time. This calls for efficiently splitting your investment into stocks, bonds, and money markets. Stocks are exposed to the highest level of risk in the market but also known to have the highest returns as well when fluctuations are flattened. Bonds have the medium risk-factor as they are less critical to price movements in the short-run. Money market is the low-risk option that trades in short-term loans with high liquidity.

Monitor the Market

Monitor the Market

Keep your eyes open to the pace of the market by letting yourself in during low stock prices while exiting just when the stock price rises. Invest a fixed amount of money into the markets which have a volatile price movement. A systematic investment plan can lead you to withstand the fluctuations and volatility of the financial market.

Decide on the Risk Limit

Limit your risk investments according to your knowledge and experience. While a young individual with less responsibility may afford to take a chance with an aggressive investment, but an elderly individual should restrain from doing so and incline towards more stable means of wealth.

Research Before You Leap Forward

Manage Risk

Do not just jump into a risky investment without calculating the risks. Before investing in a stock, carefully evaluate its price movement in the market and seek for its competitive advantage in the long run.

This was just an overview on the broader topic of managing risk when building wealth. Understanding the details of a risk management plan to accomplish successful financial goals is well explained in the following books:

1. The Only Guide You’ll Ever Need for the Right Financial Plan: Managing Your Wealth, Risk, and Investments by Larry E. Swedroe with Kevin Grogan and Tiya Lim

2. Zero Risk Real Estate: Creating Wealth through Tax Liens and Tax Deeds by Chip Cummings

Why We Recommend These Books

The Only Guide You’ll Ever Need for the Right Financial Plan: Managing Your Wealth, Risk, and Investments by Larry E. Swedroe with Kevin Grogan and Tiya Lim

All the critical elements of financial security ranging from asset allocation to risk management are all assembled in this book in a step-by-step fashion for an outstanding investment strategy. The book addresses investment policies, strategies on tax-efficient asset locations, cost-effective maintenance of risk profile, and integration of risk management issues into a full-proof financial plan.

The author being the Principle and Director for The Buckingham Family of Financial Services has extensive knowledge of the financial security plans with some impressive records of asset management expertise.

Zero Risk Real Estate: Creating Wealth through Tax Liens and Tax Deeds by Chip Cummings

This book guides you through the dos and don’ts of getting the highest returns with the lowest amount of risk by incorporating the centuries-old investment methodology of Tax lien sales and tax deed auction. You will learn about the most profitable investment strategies, efficient investment research, and guaranteed fixed returns all in one book to make you an expert in dealing with delinquent real estate taxes.

The author, Chip Cummings, is an exceptionally credible individual who had been featured on numerous noteworthy news was the former president of the Michigan Association of Mortgage Professionals. He provides significant consulting services to thousands of leading professionals each year.

Bottom Line

Investors with an increasing inclination towards wealth building need to have a paramount comprehension of financial planning to sustain their wealth in the future. As the saying goes ‘With great power comes great responsibility, so do the investors require expert advice and perception on the strategies to understand, analyze and act to manage risk when wealth building.