Individual risk management
The importance of planning for the long term, especially when planning retirement and other lifelong events, is critical. In systems like ours, the sustainability of social security is not guaranteed and family support is fragile. We therefore have to create and establish alternative measures to prepare for a demanding and uncertain future.
Structuring assets and making investment decisions with thoughts on the various stages of life and on the relationship between human capital and financial capital is therefore one of the main foundations of investing.and saving. A mandatory and strategic act in life, whether individual or family.
This approach is based on the longevity risk, which is the risk of living longer than estimated and not having enough assets to maintain the lifestyle and finance any unexpected situations that arise.
But also the risk of premature death. And here, we can question the family well-being, especially when the family depends to a large extent on individual income.
There are also situations such as illnesses, accidents, unemployment or other situations that jeopardize individual and family financial stability that are unexpected but must be part of the planning.
Insurance is a good solution to transfer these risks. They protect us against the loss of human capital but also help us structure and balance financial capital. Typically human capital is most significant in the initial phase, when we start working, decreasing as we get older and increase our financial capital.
We simulate the current value of human capital and project the value of financial capital. The relationship between them is essential for managing risk and making decisions.
About phases or stages of life, there are several approaches. We tend to demonstrate a certain pattern of behavior during our lifetime. For simplicity, we can divide it into 4 phases:
- Foundation, as an initial base in building wealth;
- Accumulation, phase in which income and expenditure accelerate;
- Maintenance, where heritage preservation is already the most important;
- Distribution, stage of transfer of assets and use of assets to live and maintain a lifestyle.
We must be rigorous and disciplined at every stage. Therefore, planning is essential to define and achieve goals and to manage risk in a personalized way.
Although there is a pattern of behavior, we are all different. Basing the investment philosophy on goals (goals-based advice) allows the investor to define multiple financial goals throughout the various phases of life and adapt the investment portfolio at any given time. Always using the essential tools for managing individual risk.
Vítor is a CFA® charterholder, entrepreneur, music lover and with a dream of building a true investment and financial planning ecosystem at the service of families and organizations.