We're All Risk Managers INTRO: Risk management is a term most often associated with the Insurance Industry. Certified financial planner Bruce Hagan of RAI Investments and Corporate Securities Group is with us today and he states we are all risk managers and that risk can be thought of as a good thing! Q1. Bruce, how can risk be considered good? A1. Well, in the Chinese language the work "crisis" is formed using characters form two other words: "risk" and "opportunity". And It’s important for us to recognize that without risk there would be very little, if any, opportunity. In the CFP Investment class I teach at FSU, one of the definitions of risk is stated as the uncertainty regarding the expected return on an investment. In a risk less world there would be no uncertainty and therefore no variability of return and we would all earn the predictable, low rate on our investments. Q2. So you'er saying that risk itself creates the opportunity for higher returns. A2. Exactly and we see this in every day life. A person who opts to take a commission sales job versus a salaried administrative position has an opportunity to make more money, but with more risk. Similarly, the person who invests in stocks versus treasury bills assumes more return potential with greater risk. Now, in both cases there’s no clearly right or wrong choice, it’s a matter of which suits the individual. Q3. So how are we risk managers? A3. We make decisions every day about risk. Even our inaction can be a decision concerning risk. If we fail to buckle our seat belt when we drive we have made a decision to take more risk. The obvious fault with that is that there’s no increase in potential reward for taking that added risk. Anytime you take on more risk without an increase in potential return you have made logistical error. If taking the risks inherent in the stock market could only yield me the same return as a government guaranteed Treasury bill, I’d be crazy to invest in the stock market. Q4. Is it easy to always analyze risk? A4. In some cases it’s very easy-ex. Should you wear a seat belt? Other cases are more difficult - Should I take a commissioned or salaried job? In investing there are some investments that obviously carry more risk than other; often, however, measurement of risk is difficult. There are some statistical methods utilized including beta and standard deviation, but it’s still a challenge to 1. Determine the level of risk appropriate for you and to then 2. Create a diversified portfolio with the right blend of securities to match that risk profile. Q5. So should we necessarily look to take the least amount of risk possible? A5. Not necessarily. Rather than risk avoidance, we should strive to be risk-averse investors which means accepting a given level of risk only if there is a high probability of achieving an adequate rate of return commensurate with the risk accepted. And remember, almost always diversification is a good thing. Optional: Are there specific ways of handling risk? The discussion offered above and in the movie should not be considered an endorsement by Florida State University. They are offered in the educational sense of providing thought-provoking information for our Web audience. Copyright shared with Florida News Channel (FNC), all rights reserved. Broadcast 3/12/99