Key Money Goal: Risk Management

Article excerpt

In the business of running your individual or family finances in the mid-1990s, overseeing the cash flow and investing for a worthwhile reward fulfills only half of the job description.

The other half, as increasing numbers of advisers are coming to see, consists of what modern corporate America calls "risk management."

In just the past few months, the investment world has witnessed two dramatic news developments _ the bankruptcy of Orange County, Calif., and the collapse of a venerable British bank _ that amounted to failures in risk management.

These were crashes that could have been prevented, just about everybody agrees, if better measures to recognize and control risk had been taken.

Risk management in your own money matters includes traditional defensive measures such as buying insurance and safeguarding negotiable securities in a safe or safe-deposit box.

But it also extends to studying the risks that you face, either inevitably or voluntarily, in your saving, spending and investing, and dealing as sensibly as possible with them.

The idea is to strike a balance between two undesirable extremes _ recklessly taking chances, or unnecessarily restricting your options by seeking to avoid any risk whatsoever.

Even if you want to, it's impossible to expunge financial risk from your life entirely. If you have any assets, they are vulnerable to loss from an assortment of catastrophes ranging from worldwide economic collapse to a personal liability suit.

What you do about all these potential perils depends on your personal assessment of the threat they represent and the practicality and cost of protective measures.

Insurance is the classic risk management product _ life insurance, health insurance, home and car insurance, disability insurance, and so forth. The Social Security system and other government "safety net" programs are at heart insurance systems.

If you wish, you can also seek out investments that are covered by insurance against risks such as default. …