Those reading this for the first time are the type of people who like to take initiative and if I have to take a wild hack at it, I would guess you want to have a real solution to some financial problems you may have. Otherwise, you are young and knowledgeable enough to realize you need a solid financial plan to help you prosper. To reward you for your actions, I will let you decipher the scene this riddle is trying to describe “A man parks his car at the Hotel, He then realizes he’s broke”…..Still guessing?…… The answer is Monopoly.
Now as much as this depicts a fictional situation, it is as much a true reality. People sometimes save up an impressive amount of money but eventually stall in their growth due to uncontrollable events. What I’m trying to get across is that great portfolios aren’t just about the profits and income they provide but as well as how much protection they have towards risk.
The risk that’s being highlighted isn’t the one that makes us weak in the knees while we all watch the stock market dive better than an Olympian diver, but rather the risk that is associated with your own production. To better understand, let’s take the illustration where you had a money making machine in your household where you would be able to print out money. Every day, from 9am to 5pm you can collect whatever money it has printed out for you. This situation would be great because everyone would love to have a money-making machine but now there is a risk associated, the machine could eventually break.
At this point, you realize how important this machine is to you and so you’d probably protect it by buying new parts and making sure it has everything it needs in order to continue printing money. The truth is that this money-making machine is indeed yourself working and so the risks are directly involved with losing the ability to work.
The reality of it is that many people are building great portfolios but the risk still lies in whether or not they will be healthy enough to continue on their plan without protecting themselves. A solid portfolio should provide Wealth management as well as Risk Management while covering 4 main areas known as short term (liquidity), long term (retirement), Disability coverage and financial security at death. I would like to go through each area to get a better understanding.
Liquidity is the accessibility of cash when you most need it. I like to look at liquidity as money set aside for 2 big reasons: 1) Business opportunities and/or 2) Emergencies.
In Business opportunities we usually set aside money so we can benefit from any unexpected offers or opportunities, for example a condo that you have never planned of buying suddenly sounds appealing or your buddy calls you and offers to start up some sort of business. In each of these situations you want to make sure that you are able to get the most out of every opportunity life throws at you.
On the flip side, when an emergency comes along, you are relieved that you have saved up a set amount of money. For example, troubles around the house are inevitable, for some it’s the roof for others it’s a plumbing issue bottom line is that everyone has emergencies whether they are big or small they are all problematic. Having that liquidity available is relieving.
Retirement is the long-term plan that determines the accuracy of your dream once the everyday routine fades and your next worry is “what can I do tomorrow”. This is the simplest area of planning but yet the hardest to achieve since a good plan is best started at a young age where retirement is but an abstract concept. The main focus in this area is that a plan is started early and is consistent throughout the desired timeframe.
Disability coverage is the insurance that covers any disability that may stop you from working or any illness that can be life-threatening.
In disability we mean any injury or event that causes an inability to work hence an inability to get paid. In these circumstances a person can end up being devastated and threaten their portfolio and even more their estate.
In illness we refer to critical illnesses stated as: Cancer, Heart attacks and Strokes. These illnesses can not only affect the person in question but their family as well. Critical illness coverage would provide a lump sum amount to any insured 31 days after diagnosis. The idea here is to provide a lump sum amount to cover any medical expenses which would potentially stop your personal growth.
Financial security at death is the area which we least want to think of, although it could be an area where if not properly looked at, could put family members or heirs in peril. The goal here is to look at the coverage necessary to leave the succession with the least problems possible.
To conclude, the solid plan lies in the ability to incorporate all 4 areas within a portfolio otherwise each missing area will simply add Risk unequal to its return to a portfolio. That extra risk can easily be avoided and many Canadians are just ignoring it when they don’t need it and beg for protection when they do need it.
A good advice would be to get in the lead and get an advantage by working the other way around: Protect yourself when you don’t need it and ignore it when it happens and you’re protected.