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In the world of finance, risk management refers to the practice of identifying potential risks in advance; analyzing them and taking precautionary steps to reduce/curb the risk.
Whether you are investing in your retirement plan or for more immediate financial needs, there are only three things that can keep you from achieving your goals: inflation, taxes, and risk. It is easy to plan for inflation and to reduce taxes, but risk is another matter because it is unpredictable. It can come in many forms, but the result is always the same: loss of money. It might be due to loss of family income from death, disability, illness, legal action, or other circumstances beyond one’s control.
There is no way to eliminate all risk, but there are ways to avoid, minimize, or protect yourself and your family from risk.
An individual should have a realistic understanding of his or her ability and willingness to stomach large swings in the value of Portfolio.
Investors who take on too much risk may panic and sell at the wrong time. It is important to note that 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.