Risks Factors That Increase Chance of Failure of Financial Plan
Financial Pundits and Academics usually consider the notion of risk in statistical terms which has been translated to investors through the use of ledgers, graphs and pie charts. What’s your Beta? How about your Alpha? For your purposes, risk might be the probability or chance of not reaching your financial goal or destination. Risk cannot be avoided, but through a financial planning process focused on your True North you can better manage the risks we all face.
The personal risks an individual investor faces are determined by the specific factors related to family status, health, financial goals and the ability to satisfy their needs and desires based on accumulated assets. Some form of financial triage is a necessity for most individual at some point during their financial life cycle. Remember, the purpose of the financial plan is to succeed in meeting your financial goals which may require distinguishing between your needs and desires, so you do not run out of money!
Some of the risks that can keep you from reaching your True North:
- Liquidity Risk – Inability to have cash on hand when bills are due
- Asset Allocation Risk – Current asset mix provides low probability of success
- Purchasing Power Risk – Current income cannot keep pace with inflation
- Opportunity Risk – Failure to make decisions on a timely basis
- Agency Risk – Advice provided is good, but not the best option
- Asset Protection Risk – Assets not protected from litigation
- Tax Risk – Failure to claim all eligible tax credits, exemptions and deductions
What are the risks that you face? Reduce the risk of failure with the establishment of a written financial plan for your goals and objectives and an investment policy statement for your investment strategies.
