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Planning Commentary

The next stop on the Waypoint Journey this year involves a look at your financial world through the lens of risk management. This involves a comprehensive look at your situation to ensure we have identified the major risks that affect you and made an appropriate plan to handle them. Our discussions will likely revolve around how to use insurance to manage risks, but insurance is in fact only one of the four main strategies to manage risk – accept, avoid, mitigate, and transfer – each with their own upsides and downsides.

Accepting a risk makes sense to do when both the likelihood and severity of loss are low. Think of this as “low stakes” – like leaving the house without an umbrella on a sunny day. It’s not likely to rain, and even if it does, you’ll just get a bit wet. You get the benefits from taking the risk, but you shoulder the consequences if things go the wrong way.

Avoiding a risk falls at the other end of the spectrum and is a smart route to take when a risk is predictable and its consequences severe. If the forecast calls for a foot of snow, you might elect to run your errands on a different day. This way you avoid the danger of being stuck in the snow, but you also have to give up making progress on your to-do list.

Mitigating risk is a strategy for a risk that has a high likelihood of happening, but with low impact if it does. There’s a very good chance you’ll get sunburned if you go to the beach in the summer, but you can reduce that risk by using sunscreen. This can be a “best of both worlds” solution, but typically involves either some compromise or additional cost.

Transferring risk (that is, using insurance) is for risks that live in the catastrophic realm – low likelihood, but high severity. This is where the well-known personal insurance products live. The consequences of your home being destroyed (say, by a tornado) are as extreme as it gets – representing a loss that most people cannot accept – and it’s expensive to build tornado-proof houses. A more economical option is to purchase insurance to reimburse you the cost of rebuilding if a tornado strikes. The main downside to risk transfer is that it costs you money, no matter what actually happens.

These strategies can apply to just about any risk in your life. While most of the time the choice is obvious, it can be a helpful exercise to think through your options when it comes to less clear-cut choices.

As always, please do not hesitate to reach out if you have questions about your situation, or anything else.

Sincerely, Waypoint Capital Advisors