Inadequate risk management can result in severe consequences for companies as well as individuals. For example, the recession that began in 2008 was largely caused by the loose credit risk management of financial firms.
What is Risk Tolerance and what do we do at Dilzer
An individual should have a realistic understanding of his or her ability and willingness to stomach large swings in the value of his or her investments. Investors who take on too much risk may panic and sell at the wrong time.
Factors Affecting Risk Tolerance are time horizon of staying invested, objective, future earning capacity, and presence of other assets like a home, pension benefits, which lend stability of income sources.
We at Dilzer, discuss and undertake risk tolerance with our clients through a risk questionnaire on an annual basis.
Risk Capacity identifies the amount of risk for a given level of return that the client must take to meet his goals.
It is important to note, Risk Tolerance and Risk Capacity are not the same. While the former, is specific to an individual’s ability to withstand volatility, the latter, considers, what is the appropriate level of risk required for a defined level of return.
There are different Types of Risk:
- Systematic Risk – This is due to external factors and not controllable by an organisation. Examples of such risk is Interest rate risk, market risk, and inflation/ purchasing power risk.
- Unsystematic Risk- This risk is due to internal factors prevailing within an organisation. Examples of such risk is business or liquidity risk, credit risk, operational risk.
We follow an in-depth Risk Management analysis at the time of Financial Plan preparation and at the Annual Goal Review Stage.