Is This Risk Worth Taking?

Have you ever been faced with a difficult decision?  Not sure which way to go because you didn’t fully understand the risks involved?  Much like playing cards, there are times where we need to fold, and move on, and there are times where we should stay in the game based on anticipated risks and rewards.

When evaluating risk associated with financial planning, there are some risks that we are willing to endure, and there are some risks that we should probably insure against.  Here are a few factors to consider when evaluating whether to “hold your cards” or shift that risk to someone else.

  • What is the potential severity of loss? If the potential loss could be devastating, then it’s probably not one to hold your cards.  If you suffer the loss of a home or a vehicle, the financial losses could be devastating.  If you suffer the loss of a loved one prematurely, or live beyond what your retirement assets can support, the losses can be devastating.  Because of the magnitude of these risks, they are commonly shifted to an insurance company for protection.
  • What is the likelihood of loss? If the loss is severe, but not likely, then a choice can be made to bear the risk on your own.  However, when the loss is not likely, the cost of insurance is usually relatively low as well.

If the loss is both likely and severe, then avoiding that hand all together is the right choice if possible.  A great example is speeding.  If you speed, the likelihood of having financial loss is very likely.  The losses could also potentially be very severe.

So whether you are playing cards, or evaluating your financial plan, keep these factors in mind the next time you are trying to decide whether a risk is worth taking.

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