The 3 Risk-Pairs You Haven't Considered (But Your Financial Planner Has)
In our last post, we covered the critical difference between ‘Good Risk’ and ‘Bad Risk.’ Now that you have that foundation, let's take a deeper dive in this second part of our series. It’s time to move beyond the basics and explore the more subtle types of risk that can impact your financial well-being.
What about the risks that aren't on a spreadsheet? The ones that can quietly derail even the most carefully crafted plans—like the gut-wrenching urge to sell during a market dip, the ripple effects of a widespread economic event, or the hidden emotional toll of a financial crisis. These are the risks that keep people up at night, and they are exactly what a holistic financial plan is designed to address.
Today, we’re pulling back the curtain on three "risk-pairs" that we, as financial planners, use to get a complete, 360-degree picture of a client's life. Think of them as the insider tools for a more advanced risk assessment.
Beyond the Basics: Seeing Your Life Through a Risk-Expert's Eyes
When most people think about financial risk, their minds jump to stock market volatility. While that’s certainly part of the equation, a truly comprehensive financial plan sees risk in a much broader, more personal context. It’s about understanding the unique interplay of facts, feelings, personal circumstances, and global events that shape your financial reality.
Holistic financial planning isn't about simply building a portfolio; it's about building a resilient life. To do that, we need to diagnose potential vulnerabilities with precision. The following three pairs of contrasting risks allow us to see your situation with the clarity needed to protect what you’ve built and help you confidently pursue your goals.
Mind vs. Math: How Your Feelings (Subjective) and The Facts (Objective) Shape Decisions
The first, and perhaps most important, distinction a financial professional makes is between what is felt and what is factual.
Objective risk is the statistical, measurable, and impartial probability of an event occurring. It’s the data-driven reality. For example, the objective risk of a commercial flight crashing is incredibly low—around 1 in 11 million. The math is clear: flying is one of the safest ways to travel.
Subjective risk, on the other hand, is your personal perception of that risk. It’s the knot in your stomach during turbulence or the sweaty palms you get at takeoff. For many, the subjective risk of flying feels enormous, despite what the objective data says. It’s driven by emotion, past experiences, and human psychology, not by spreadsheets.
This is where my training as a Chartered Financial Consultant® (ChFC®) becomes so crucial. A significant part of our curriculum is dedicated to understanding the human element of finance—the field of behavioral finance. We know that when markets are volatile, it’s your subjective vs objective risk perception—the fear in your gut—that drives decisions, not the objective data showing that markets have historically recovered from every downturn. My role isn't just to show you the charts; it's to act as a coach, helping you navigate those powerful feelings to prevent fear-based decisions that could jeopardize your long-term financial security.
Your Problem or Everyone's Problem? Why Fundamental vs. Particular Risk Matters for Your Plan
Next, we need to categorize risks by their scope. Are we dealing with a personal problem or a problem that affects everyone? The answer dictates the solution.
Particular risk is a risk that affects an individual, a family, or a small group. It’s localized and personal. Think of a house fire, a car accident, or a specific illness. While devastating, these risks are not experienced by the entire population at once. Because they are particular, they are often insurable. We protect against them with tools like homeowner's, auto, life, and disability insurance. Your plan for a particular risk is to transfer that risk to an insurance company.
Fundamental risk is a large-scale risk that impacts a whole community, economy, or even the world. It’s impersonal and widespread. Examples include a recession, high inflation, a pandemic, or major geopolitical events. You can’t buy an insurance policy against a recession. The strategy here isn't to transfer the risk, but to build resilience against it. This is why we diversify portfolios, maintain a robust emergency fund, and create flexible spending plans.
Understanding the difference between fundamental vs particular risk is key to an effective financial strategy. It ensures we’re using the right tool for the job—insurance for the personal risks and strategic planning for the systemic ones.
It's Not Just About the Money: Linking Financial and Non-Financial Risks
Finally, a truly holistic plan must acknowledge that a crisis has more than just a monetary cost. Every financial event carries a human cost, and ignoring it is one of the biggest mistakes in financial planning.
Financial risk is the straightforward, dollars-and-cents impact of an event. If you lose your job, the financial risk is the loss of your income, the depletion of your savings, and the potential disruption to your retirement contributions. It’s measurable on a bank statement.
Non-financial risk encompasses all the other consequences—the emotional, psychological, and social fallout. Using the same job-loss example, the non-financial risk includes the stress on your mental health, the strain on your family relationships, the loss of your professional identity, and the damage to your sense of purpose and confidence. These costs, while not listed on a spreadsheet, can be far more debilitating than the temporary loss of income.
A great financial plan is designed to mitigate both. Having a six-month emergency fund (addressing the financial risk) does more than just pay the bills. It provides the peace of mind and breathing room you need to navigate the emotional turmoil (the non-financial risk). It gives you the stability to make clear-headed decisions about your next career move instead of taking the first job you’re offered out of panic.
A Professional Perspective on Your Complete Picture
By learning to see your life through these professional lenses—subjective vs. objective, fundamental vs. particular, and financial vs. non-financial risk—you move beyond basic money management and into the realm of true, holistic financial planning. This advanced risk assessment allows us to build a plan that’s not just mathematically sound, but also emotionally resilient and prepared for life’s complexities. It’s about creating a strategy that works for the real you, in the real world.
A comprehensive financial plan addresses all types of risk, not just the obvious ones. Download our free 'Personal Risk Audit Checklist' to see where you might be exposed.