Risk is an unavoidable part of life. Whether running a business or investing your hard-earned wealth in the stock market, everyone must account for and manage their exposure to the consequences of certain financial risks. However, this risk can also have positive outcomes if you know how to benefit from it. 

Business risks can stem from macro and micro economic changes, competitive pressures, and unexpected events like natural disasters. For individual investors, risks often involve market volatility, inflation, or bad decision-making.

While risk cannot be eliminated, there are smart strategies you can employ to manage it, which we’ll discuss in this blog. You will need an objective investment process to manage these risks. This could include strategies like diversifying your investment portfolio, securing appropriate insurance coverages, and planning for unforeseen events. 

Read our latest Quick Guide: Comprehensive Financial Planning in Danvers, MA

As Danvers financial advisors, the Sherr Financial Associates (SFA) team specializes in helping successful business owners and individual investors create strategic risk management plans to better prepare them for economic headwinds and planned or unplanned life events. By combining insurance and investment strategies with a holistic planning approach, SFA helps preserve wealth and pursue future financial security.

Proactive Risk Management Strategies

Intelligent risk management begins with identifying potential threats to your financial well-being. From there, you can design strategies that address each of these risks. As a high-net-worth individual, the stakes are higher because you have more to lose if you don’t get it right. 

Following are a few investment strategies you can employ to help manage your family’s financial future: 

1. Diversification: By allocating your investments across various asset classes (stocks, bonds, real estate), industries, and geographical regions, you may effectively reduce your risk of big losses. 
2. Asset Protection Planning: Structuring ownership of assets through trusts, LLCs, or family limited partnerships can help shield assets from lawsuits or creditors.
3. Liquidity Management: You should always have access to liquid assets (cash/cash equivalents) for short-term emergencies, business continuity, or market downturns to avoid forced sales of investments when their prices are lower. There may also be substantial tax consequences if you are forced to sell appreciated investments at inopportune times. 

Download our newest eBook: “The Multigenerational Wealth Playbook: Cost-Effective Strategies for Tax-Efficient Wealth Transfer.”

Insurance Solutions for Risk Mitigation

Insurance can also play a pivotal role in your risk management strategy. Custom, tailored strategies can protect your assets and income when you experience unexpected events. SFA can recommend and coordinate the right insurance coverages for your personal, family, and business needs.

1. Life Insurance: Life insurance is a versatile tool for risk management. For individuals, it ensures that loved ones are financially protected in the event of premature death. For business owners, policies like key-person insurance or buy-sell agreements funded with life insurance can safeguard their company’s futures.

For example, an entrepreneur should consider having a permanent life insurance policy with a cash value component. This provides death benefit protection and is a tax-advantaged savings vehicle to supplement retirement or fund estate taxes.

2. Liability Insurance: High-net-worth individuals with $1 million or more assets may face higher liability risks due to their lifestyle and visibility. Umbrella liability policies provide additional coverage beyond standard home and auto insurance, protecting against lawsuits and frivolous claims.

For example, if you own a successful business or multiple investment properties, consider securing a $10 million umbrella policy to cover risks beyond your primary insurance limits and protect your assets from potential lawsuits.

3. Long-Term Care Insurance: Healthcare costs are a growing concern for many Americans, especially older individuals or couples with pre-existing health conditions. Long-term care insurance covers assisted living, nursing homes, or in-home care expenses, preserving assets for heirs, or other financial goals.

For example, consider purchasing a hybrid life insurance policy with long-term care benefits. This provides flexibility to use funds for care if needed while creating a death benefit for beneficiaries.

Investment Strategies for Managing Market Volatility

Preserving your portfolio from market volatility should be a top priority. Following are a few strategic investment management strategies to minimize the impact of these risks while pursuing long-term growth.

• A core-satellite approach balances risk and returns by combining stable, diversified investments (the core) with higher-risk, higher-reward strategies (the satellites). Say you allocate 70% of your portfolio to a globally diversified mix of index funds and bonds (core) and 30% to alternative investments like private equity, hedge funds, or real estate (satellites). This strategy can reduce overall volatility while providing potential growth opportunities. 

• Hedging can help manage against market downturns using derivatives or other financial instruments to offset potential losses. If you have a large position in a single stock, you can consider alternative investment strategies to help hedge against potential stock value declines.

• Tax considerations are crucial in managing net investment returns. Focusing on strategies like tax-loss harvesting, investing in municipal bonds, or Roth IRA conversions may allow you to reduce your tax burdens while improving your overall returns.

• If you are closer to retirement or recently retired, you can still invest in equities using blue chips, higher dividend-paying stocks, convertibles, and preferred stocks.

• As noted, you should always have access to liquid assets (cash/cash equivalents) for emergencies, business continuity, or market downturns to avoid forced sales of investments where you may be impacted by unnecessary losses or capital gains taxes.

Business Risk Management

For business owners, risk extends beyond personal wealth, including operations, employees, and continuity planning. Following are some examples of risk management tactics you can take to protect your assets:

• Key-Person Insurance: Protect your business from financial loss if a critical employee or owner dies.

• Buy-Sell Agreements: Structuring ownership transitions in the event of death, disability, or retirement.

• Employee Benefits Planning: Offering competitive benefits while managing costs to attract and retain top talent.

• Comprehensive Asset Reviews: Identifying gaps in insurance or investment coverage.

• Custom Policies: Working with a team of Danvers financial planners, you can create insurance and liability protection plans unique to your personal and business situations.

Why SFA?

SFA has extensive experience in risk management for business owners and high-net-worth individuals. We use proactive investment and insurance strategies to help you avoid personal and business risks while protecting and retaining your financial independence. 

If you’re ready to explore various risk management solutions for you and your family, we invite you to connect with us.

This material is intended for informational/educational purposes only and should not be construed as tax/legal/investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Sherr Financial Associates does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

The scenarios used in this material are hypothetical examples and are for illustrative purposes only. No specific investments were used in these examples. Actual results will vary. Past performance does not guarantee future results.

Investing in alternative investments may not be suitable for all investors and involves special risks, such as risk associated with leveraging the investment, utilizing complex financial derivatives, adverse market forces, regulatory and tax code changes, and illiquidity. There is no assurance that the investment objective will be attained.