You’ve probably heard the phrase, “You’ve got to risk it for the biscuit.”
While it’s lighthearted, it captures a deeper financial truth: in order to earn competitive returns, you must accept a certain level of risk.
But here’s the thing—taking risks feels very different depending on your circumstances. It’s easier to take risks when:
-
You have biscuits to spare (extra capital), or
-
You have time to bake more (a long investment horizon).
The real trouble begins when you’re running low on both: limited resources and limited time. That’s when managing financial risk becomes not just important—but essential.
Types of Financial Risk (and What They Really Mean)
Let’s keep going with the biscuit analogy—there are a few things you knead to know.
“Risk” is a broad umbrella term. It includes several key types:
-
Market Risk: The chance that investments will decline due to market movements.
-
Inflation Risk: The eroding power of your money over time.
-
Business Risk: The potential that a company you’ve invested in may fail.
-
Legislative Risk: Changes in laws or regulations that can impact your investments.
None of these are inherently bad—they’re simply realities to understand and plan for.
Now, let’s look at two common tools used to evaluate risk:
-
Volatility: This refers to how dramatically and quickly investment prices can swing. Advisors often talk about “maximum drawdown”—a way of understanding how far your portfolio might fall during a market downturn.
-
Beta: Beta measures how volatile your investment is compared to the market. A beta of 1.0 means it moves in line with the market. A beta of 1.1 means it’s 10% more volatile. Think of it as your personal spice level—some portfolios have a little more kick than others.
Baking Up a Balanced Financial Strategy
Managing financial risk is a lot like baking: you need the right ingredients, good timing, and an awareness of how heat (aka volatility) affects the final result.
-
Market Risk = Flour: the base of your investments, sensitive to conditions.
-
Inflation Risk = Baking powder: rising quietly in the background.
-
Business Risk = Eggs: foundational, but fragile.
-
Legislative Risk = Seasoning: sometimes surprising, occasionally overpowering.
The key is balance. Just as biscuits need the right mix to rise properly, your financial plan should be built to withstand both calm and chaotic markets.
Final Thoughts
Avoiding risk entirely isn’t the goal—that would mean sitting on the sidelines while inflation slowly eats your buying power. Instead, the aim is to understand risk, measure it, and bake it into your long-term financial plan in a way that aligns with your goals.
At Glenn Financial, we help you assess these risks thoughtfully so your financial biscuits don’t get burned—or underbaked.
