Understanding Risk Analysis

Paul Miller |

Every decision in life has consequences. The positive consequences, often referred to as the benefits, are those things which you expect to enjoy or benefit from as a result of a decision. Negative consequences are those which have a harmful impact on your life. In terms of investing, risk analysis is the process of looking for and trying to minimize the impact of negative consequences that can stem from any investing decision.

Investment Risk = Deviation from the Expected Outcome

There are many ways that risk analysis can be defined, but perhaps the most applicable to the financial world is, "the uncertainty of forecasted future cash flows, variance of portfolio or stock returns, statistical analysis to determine the probability of a project's success or failure, and the possible future economic states."

Risk analysis can be expressed in absolute terms, or defined as relative to something else, such as a standard deviation. An example of analyzing risk would be looking for the downside in attempting to achieve higher returns in the long run. If you want higher returns from your investments, you are going to face periods of short-term volatility.

Building on that analysis, financial advisors can assess your risk tolerance. How comfortable are you dealing with uncertainty in the market? Or absorbing losses during the short-term to stick it out and realize long-term growth?

At Indian River Financial Group, the key to success is the right mindset. By properly preparing for risk in your mind, you are likely to cope with it better when it occurs.

Dangers of Misunderstanding and Mismanaging Risk

If you control your own investments without the guidance and assistance of a financial advisor, it is likely that you will underperform the markets because you do not fully understand all forms of risk. No one can control the markets, but anyone is capable of controlling the risks with proper risk analysis.

Research has shown that positive portfolio performance is more common when there is effective risk management. Additionally, it has less to do with the selection of investment securities and the timing of your investment.

Goal of Indian River Financial Group, Inc.

At Indian River Financial Group, the goal is to help clients minimize and control the risks they face in the market. When you worry less about the risks and feel more confident in your investment strategy, you can enjoy your life rather than worry about your future.

The process starts with counseling all clients on how to purposefully utilize risk in their portfolio. Remember, greater returns are tied to investments with a little bit of risk. The goal is to properly use that risk to build a portfolio that provides a greater overall return in the long term.

Each client's risk "fingerprint" is identified using a Riskalyze tool. That risk fingerprint is identified in terms of absolute, numerical values and used to assess your current portfolio. It allows Indian River Financial Group advisors to compare your current portfolio of investments to your risk fingerprint. You may find that there is an alternative portfolio alignment that better optimizes your risk fingerprint, opening the door to greater returns in the future.

Overall, the goal is to use new analytic tools to optimize volatility control and help your investments overcome a bear market, and recover faster.