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Learn To Identify And Manage Risk!

Aug 17, 2007
When I want to cross a road, I face the risk of being knock down by incoming vehicles. When I take a bus, I face the risk of a bus accident. When I catch a plane, I face the danger of the plane crashing. When I walk on the road, I face the risk of slipping and fall.

Basically, I find that risk is inherent in my daily life. There is no way I can run away from risk totally. Since there is no way to run away from risk, what is the next best available option?

Learn to identify and manage risk!

Risk is very dangerous when I am ignorance of it. But if I am aware of the risk, then I can find ways to manage the risk so that I can take advantage of the situation. For example, if I know that walking on road frozen with ice can cause a fall, I can buy a pair of special shoe that can walk on ice surface. I have an advantage over others because I can walk on slippery road without falling.

Before I can manage the risk, it is important that I have the knowledge to identify the risk of doing something. For examples, if I do not have the knowledge that road is for vehicles, I will not be aware of the risk that I can be knocked down by vehicle. If I do not have the knowledge that slippery road has less friction, I will not be aware of the risk that I can slip and fall.

Similarly, this applies to investment too. Investment is risky only if I do not know how to identify and manage the risk involved. According to what I have gathered from the Rich Dad series, I definitely need to invest if I want to accumulate great wealth. Since there is no running away from investment if I want to be rich, I may as well learn to invest. And the first step will be the need for me to learn how to identify the risks involved.

For examples, if I want to invest in shares, it is important that I have the knowledge to identify the risk of investing in shares. If I am ignorance of the risk involved in investing in share, I will face the risk of losing money. If I want to invest in real estate, it is important that I have the knowledge to identify the risk of investing in real estate. If I am ignorance of the risk involved in investing in real estate, I will face the risk of losing money.

Once I am able to identify the risk, I still need to find ways to manage risks. What are the possible ways to manage risks in general?

Firstly, I can avoid the risk altogether. For examples, if I come across a slippery stretch of road ahead, I can divert my walking course. If I want to manage the risk of the plane crashing, I can avoid taking flight altogether. If I apply this rule to investment, then I may want to avoid certain investments if I feel that I cannot handle them myself. In this way I avoid the risk altogether.

Secondly, I can transfer the risk to another party. For example, if I want to manage the risk of being knocked down by vehicle while crossing the road and thus having to pay tons of medical bills, I can buy medical insurance that cover accident. If I apply this rule to investment, then I may want to buy insurance on my investments. If I have real estate, I may want to insure my real estate against fire. If I have gold coins collection, I may want to insure my coins against theft.

Next, I can reduce my risk. For example, before I cross the road, I will look left and right to ensure there is no incoming vehicle before I cross the road. In this way, I reduce my risk of being knock down by an incoming vehicle. If I apply this rule to investment, I may invest in exchange traded funds where a fund manager manages the money. Since the fund manager is more expert than me in investment, my risk of losing money is reduced.

In addition, I will also use these few rules to manage my personal risks. Firstly, I will not risk more than I can afford to lose. If I cannot afford to lose one thousand dollars, then I should not be risking one thousand dollars in investment. Secondly, I will not be risking a lot for a little return. It does not make sense to risk losing one thousand dollars in order to make a small return of one dollar. Lastly, I will avoid anything where the odd of the risk occurring is too high. This is because I am almost certain to lose.

The author only provides the material and information as a layperson's views about an important subject. The materials and information are from sources believed to be reliable and from his own personal experience, but he neither implies nor intends any guarantee of accuracy.

All the materials, information and procedure in this book are only the author's personal opinion. You must consult your own professional advisor and other reputable sources on any matter that concerns you or others.

The author, publishers and distributors are not competent and do not profess to give legal, accounting, medical or any other type of professional advice. The reader must always seek those services from competent professionals who can review your own particular circumstances.

The author, publisher and distributors particularly disclaim any liability, loss, or risk taken by individuals who directly or indirectly act on the information contained herein. All readers must accept full responsibility for their use of this material.
About the Author
Max Ng shares about his struggle for financial freedom at http://www.richdadsecrets4me.com
Get a free sample of his book "Your Greatest Gift! Why Waste It?" at http://www.yourgreatestgift.com
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