How Financial Advisors Can Help You Avoid Risk
Posted by Ocean Wealth
There’s always a risk associated with any reward. That’s as true for a 5-year-old playing a video game as it is for a Fortune 500 business owner. The goal in life is to assess whether that risk, no matter how big or small, is worth the reward.
In the world of finance, risk comes with the territory. If there were none and markets always stayed the same, you’d never make any money off investments. That said, you still need to have a strategy when it comes to navigating financial risk. While ultimately unavoidable, you can minimize it in various ways to better ensure a particular outcome.
Having a conversation with a financial advisor is a great place to start. They understand financial risk better than most and can help you move around it with confidence. But before we get into the details about how you can avoid it, let’s run through the basics of financial risk.
Understanding Financial Risk
Financial risk comes in many forms. It generally refers to the different types of risks that can lead to losing some or all capital invested in a particular asset. The most common risk types out there are market, credit, foreign exchange, country, and operational.
Financial advisors use different financial risk ratios to assess a client's portfolio. One of the most important things to identify when assessing financial risk is the debt-to-capital ratio. This refers to the proportion of debt used given the total capital structure of a particular company. If there turns out to be a high proportion of debt in that company, then that would make it a risky investment.
From a financial advisor’s perspective, their job is to help you understand the types of risks associated with a particular investment. They should be able to help you break down all kinds of financial risk so that you know how to keep your investments safe.
Minimize Financial Risk Through Diversification
Diversifying your portfolio is one of the best ways you can eliminate financial risk. If you have a good variation in your portfolio with a number of investments, you won’t lose everything if one investment falters.
Even if each investment in your portfolio includes a financial risk, it matters what kind of risk. A well-diversified portfolio won’t have one type of investment with one type of risk. If the risk is spread around, the chances of each investment falling into a dangerous state at the same time are much lower. You’re essentially spreading your investments around to make sure each one has a different risk.
A good financial advisor will work with you to diversify your portfolio in the right way. They’ll help you vary your investments so that you’re not putting all your eggs in one basket, so to speak.
Look Into Hedging
While hedging is usually a more high-level financial strategy, it’s one that can significantly reduce risk as well. This method generally refers to a combination of assets chosen to offset movement among them. In layman’s terms, that means supplementing one investment’s loss with the profit of another.
There are a number of different hedging strategies to execute, depending on your needs. That said, it’s always a good idea to talk these strategies over with a financial advisor since they can offer valuable insight into which one is right for you.
Our trusted team of experienced financial advisors can help you minimize risk and create a strategy that’ll help you reach your financial goals. Contact us today!