In watching television news this weekend, I am reminded that not everyone understands the proactive nature of risk management. I’ve heard the mantra before. “Why did I buy insurance? A year came and went and nothing happened. I could have saved the premium.”

The problem with this thinking is that no one has a crystal ball. It’s impossible to know with certainty what could happen. The goal of effective risk management is to ask what could go wrong and then assess both the likelihood of occurrence as well as the economic downside should that adverse event occur. What typically follows would be a ranking of worst case “what if” situations and deciding how best to mitigate potential problems.

As I wrote in Risk Management for Pensions, Endowments and Foundations, “… informed and proactive investors have a chance to meet or exceed return targets while minimizing capital exposure, if they do their homework and stay focused on the fact that things can and do change.” Robust risk mitigation helps to stabilize returns. Without it, the value of any or all holdings could free fall or wildly zigzag with little chance of recovery.

Yes, it is true that a risk management process is going to cost something to implement. The central question is whether one can afford not to manage risks.