Wednesday, June 20, 2012

Personal Finance and Money Management 20 - Risk Management

As we mentioned in previous articles, we know that our government only represents about 30% of our retirement income. The company retirement pension plan offers another 30 % and many of us do not have one. It is up to individuals to invest wisely short and long term in order to make up for the short fall if he or she would like to live comfortably after retirement without giving up some retirement plans. In order to protect yourself against inflation, interest rate, business and market risks in your investment portfolio, it is wise to understand current economic conditions, knowledge of investments, and diversification. In this article, we will discuss risk management.

1. Life cycle risk
In fact, the amount of risk that will be acceptable will vary with the stage of the life cycle.
a) A young person with no dependents will have a higher risk level than a middle-age person with a family.
b) A retired couple requiring income to finance their life style every month tend to be more conservative than middle age people with a family.

2. Employment risk
Government employees have more income security than someone self-employed, someone working in a service industry that often lays off workers, or seasonal workers. It is wise to balance your risk if you doubt your job security, you may consider putting some savings in very low-risk debt securities in case of lay off.

3. Diversify your investments
Diversification is a basic principle in portfolio management that helps to reduce total risk by choosing securities of different types of investment vehicles (do not put all your eggs in one basket) so you spread your investment money over a variety of investments and adjust your investment according to your needs, life cycle, and economic conditions change.

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