Investors tend to think of risk in terms of their investment portfolios. However, for many Americans their largest investment is their home.
Americans seem to have a penchant for building, and rebuilding, in obviously high risk locations: abutting wilderness areas, in established paths of hurricanes, tornados and other forms of severe weather, and recognized flood and earthquake zones, to name a few. This type of construction entails above average risks and often puts first responders and citizens in danger, sometimes with tragic results.
In many ways, society as a whole supports the cost of this kind of risk taking through federally subsidized insurance programs, forestry management programs, including the costs of fighting wild fires, and a variety of tax-payer supported reconstruction programs.
Is this appropriate? The property and casualty insurance industry is well equipped to assess risks and markets insurance policies that reflect the degree of risk and the associated costs. However, premiums can be high.
Investment decisions should reflect an assessment of the relative risk versus the potential reward. Investment advisors typically are very cognizant of the relationship between risk and reward in formulating an appropriate portfolio strategy, recognizing that adverse results are borne by the investor.
While risk/reward is generally apparent in stock market strategies, what about residential decisions? Should the attraction of an ocean view be weighed and insured, by the owner, against the risk of tropical storms?
Should repeatedunwise decisions be subsidized?
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA