How You Get The Worry Out Of Risk

Informed Canadian Investor

In the investment industry, the word risk means there is a potential negative impact on your financial future.
The word risk covers a broad spectrum of topics, like currency, market and liquidity risks. Biases like the home country bias are also risks. With so many topics, the word risk encourages worry.
When I started working with engineers, I’ve found a great way to explain risk that gives clients far greater clarity and confidence. It is as follows.
In the 1990s, the engineering profession shifted from the term risk to the terms hazard and risk. By separating hazard from risk, engineers gave their clients greater transparency.
This is what the terms mean:
A hazard is something that might happen and risk is the probability of that hazard happening.
For example, if your portfolio had only one stock within it, a hazard is that stock might fall in value dramatically, negatively impacting your financial future. If that stock were a penny stock, that risk or probability would be higher. If it were a blue chip stock, that probability would be lower.
When you as a client separate the hazard from the risk, you will become emotionally detached from the hazards and you will become objective with risk management. Then, you become a more informed client, which I value as this means we get to roll up our sleeves when we work together.
In your journal, reserve a page for the hazards and risks you know. This will go a long way to reduce surprises.
In summary, learn how to separate the hazard from the risk. Then, discuss the strategies applied to your investments to make sure how you invest is most comfortable for you.
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