Minimizing risk

Published April 11, 2018, 12:00 AM

by manilabulletin_admin

By George S. Chua

I am sure many of you have heard of the saying “don’t put all your eggs in one basket” which can trace it’s origin from Don Quixote written by Miguel Cervantes in 1605, “It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” Clearly, even more than half a millennia ago, the concept of risk was already understood.

There are many different types of risk but the more common ones are credit, portfolio, security, fraud, transaction, safety, fire, business, and natural disasters.  You are taking on a credit risk every time you lend money to someone, which is not getting paid back on time, not getting paid back the full amount or not getting paid back at all!  Businesses such as Banks are able to minimize risk by doing their credit evaluation of the borrower and asking for collateral that will be forec-losed once the borrower fails to meet their contractual obligation.

Portfolio risk is taking the risk on putting your money in an investment or a portfolio of investments.  To minimize your risk, “don’t put all your eggs in one basket,” which essentially means do not put all your money in one investment.  The key is portfolio diversification or making investments in other companies, types of instruments or assets, different currencies and countries, as well as different maturities. This spreads out your risk.

Security risk is the exposure you and your properties face from criminal elements who want to kidnap you or steal your property.  This type of risk can be minimized by avoiding rough neighborhoods, taking security precautions by having security guards, locking up your house and so on.  Similarly, fraud risk is when criminal elements want to take away your money and assets not by force but by deception or tricking you.  An example would be buying a house from someone but the documents turn out to be fake.  You can avoid this by checking on the authenticity of documents, have your lawyers review agreements and verification of the identity of who you are dealing with.

Transaction risk arises from doing your end of the transaction but the other party does not.  Using the numerous shopping sites or even social media sites to buy and sell items can expose you to transaction risk.  If you were buying something, you could have sent the payment but you never got whatever it was you purchased, or you got something which was not what you wanted to buy. Likewise when you are selling something, you sent the item and you never got paid.  To avoid transaction risk, many people opt to do meet-ups or cash on delivery.  Some sellers are also given ratings as an indication of their reliability.

Safety risk is exposing yourself to physical harm such as riding a worn down or an unregistered public utility vehicle.  Safety features that are not available or malfunction such as life vests on board ships also expose you to safety risks.   These hazards can be avoided by the use of legitimate service providers or taking your own precautions.  Fire risks are similar in that you also risk yourself and your properties.  This risk can be mitigated by having fire safety equipment, complying with building and fire codes and taking on fire insurance to compensate you for your loss.

Business risk is what you face when you go into business which could include operational and business continuity.  You risk your capital on the business that may or may not do so well.

You can minimize your risk by doing your homework of making your feasibility study before making the investment and putting in back up contingency plans. Hiring the right people can also make a big difference.

Natural risks such as flooding, typhoons, earthquake, lightning and volcanic eruptions can be somewhat mitigated by choosing the right location and building structures that could better withstand these natural calamities.  Insurance coverage can also be taken to lessen the financial risk.

In minimizing risk you need to understand what could go wrong and prepare for such an eventuality.  Depending on what is at stake, it might be worthwhile for you to seek expert advice on minimizing your risk.

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