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Family Inc. by Douglas P. McCormick

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CHAPTER 11

Safeguard Your Assets from the Main Risks

The historical risks and returns of various asset classes provide a valuable framework for family investment decisions. Price volatility is certainly one risk the Family CFO must consider, but it’s far from the only one. As we saw in Chapter 6, the most catastrophic Family Inc. risk is the impairment of family members’ labor asset (the potential value of their work) resulting from death or disability. Fortunately, this risk can be mitigated through insurance. Other major types of risk the family must contend with include impairment of financial assets, inflation, and shortfall risk.

Asset impairment occurs when the value of an investment is permanently impaired—that is, all or a substantial part of the investment is wiped out. Three common examples include bankruptcy of a privately owned business, foreclosure on a house, and personal bankruptcy. As you might surmise from these examples, impairment is most likely in privately held investments, so investors generally demand a higher rate of return to compensate them for that risk, as well as for the lack of liquidity. For most families, however, the main private investments are the primary residence or the family business—which, if managed prudently, possess relatively low risk of impairment.

Inflation represents a significant risk to family assets. It erodes future purchasing power, requiring greater net worth to support retirement. This threat is compounded because asset ...

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