Wednesday, November 4, 2009

On risk: it's there, even if you can't see it

Editor's note: We occasionally respond to media inquiries and I thought this answer from Dan to a reporter was particularly astute. I'm posting it so you can read his thoughts on this - he makes great points. - Robyn Davis Sekula

By Dan Danford

Of all the bits of financial information available to consumers, risk is the least understood. Study after study shows that people routinely misjudge risk, and personal finance is a bad place to mess up. It's hard to see the risk in a rising stock price - until the shares plummet. Similarly, a good job seems stable right up to and until the pink slip arrives. Housing prices in a new neighborhood have never fallen; then they do. I once worked for a bank that had several decades of non-stop rising dividends. Safest bank ever! It failed 18 months after I started working there (not my fault, either!). The point is that most folks are terrible at understanding the risks in their financial lives.

There are several ways to hedge those risks. First, diversify everything. Have two family jobs instead of one. Go to school to keep your skills current or to learn a second trade. Keep emergency reserves in a savings account. Buy ten stocks instead of one, or, better yet, a good mutual fund. Financial advisors work in these realms every day, and they work with dozens of other families and situations. If nothing else, they have a better grasp on family risk than the typical consumer. Let a professional guide you to solid solutions and profitable actions.

You can save a lot of premium money by avoiding health insurance. And you might say that - based on your personal history - there's not a lot of risk in that strategy. But that's not really accurate. You may not see the risk, but it's there all the same. That's true of many family financial issues. Risk may not be obvious, but it's there anyway. Do you want to know now - or later?

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