Knowing How to Use Risk Management

Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attack from an adversary, or events of uncertain or unpredictable root-cause.

The strategies to manage risk typically include transferring the risk to another party, avoiding the risk, reducing the negative effect or probability of the risk, or even accepting some or all of the potential or actual consequences of a particular risk.

You can tell that the banks, pension funds, insurance companies, and governments did not put in place good Risk Management Procedures when they bought Derivatives in the financial markets. An analysis of the investments would have told them that they were buying mortgages of people who had little or no income. It was just a matter of time where the “house of cards” was going to cave in on them. When it did, it took people’s houses, pension fund money, jobs, businesses, and savings with it.

Our little Risk Analysis is not as complicated as all that. Look at the Investment Choices above.

I have to figure out what to buy based on my risk criteria. Since I am starting to get the feeling that businesses are still coming apart at the seams and my retirement date is only a few years away, I want to be as safe as I can be. In other words, I do not want a failure of this investment to greatly” impact” my return.

I start by looking at the S&P Rating of these bonds. Marina District Finance is into gambling businesses in Atlantic City. They are my only BB- bond on the list. Just by definition, they are the least safe. Given that Atlantic City casinos are losing market share to Pennsylvania and other North East casinos, they could be in serious trouble in 2 to 3 years. That maybe why they have an interest rate of over 10%.

Telecom Italiacap, an Italian firm in Italy has the least amount of interest and its country is not doing well in the EU. The other investments have to do with banking and have the same S&P Rating. Dresdner Bank AG has the highest interest rate. Looking at the bank’s business and the economy in Germany where the bank is located, they seem to be secure.

So I am going to buy Dresdner Bank AG .