It’s essential to understand, risk in order to plan for your financial future, because risk and returns are intertwined – you can’t have one without the other. In general, taking on more risk can provide the opportunity for both greater rewards and greater losses. It’s important to note, too, that investment risks go beyond market ups and downs.
Some risks of “low-risk” investments
“Low-risk” doesn’t mean “risk-free.” Here are two examples of the risks associated with low-risk investments. The first is inflation; if your returns don’t keep up with it, the purchasing power of your savings could be reduced even if you don’t make any withdrawals. The second is the risk of longevity – the possibility that you could outlive your money if your investment growth does not keep up with what you spend.
Some risks of “high-risk” investments
And how about high-risk investments? Here are two examples of the risks associated with them. One is market risk – the chance that you will lose some or all of your money if the market value drops substantially. Investments outside Canada may also be subject to currency risk. For example, if you invest $100 CDN in a U.S. dollar denominated investment and the U.S. dollar declines by 10 per cent against the Canadian dollar, your investment will be worth $90 even though the U.S. investment value may not have changed.
Speak with your advisor
Risk affects people differently, so it’s very important to discuss your personal feelings about risk with your advisor. Together, you can build a portfolio designed to achieve your goals within your comfort zone.
Here are three strategies to help you manage risk, while alleviating the effects of market fluctuations:
- Dollar-cost averaging: investing a small amount regularly lets you buy at different price points and average out the cost of your investments.
- Diversification: investing in different asset types (for example, stocks and bonds), industries and countries can help reduce the impact of underperformance in any given category.
- Keeping pace with life’s changes: meeting regularly with your advisor and adjusting your portfolio as you move into different life stages can help keep your investments aligned to your time horizon and tolerance for risk.
Talk to your advisor if you have questions about fluctuations in the value of your investments. It’s important that you are comfortable with your portfolio, and that comfort can come from a better understanding of risk.
This article was originally featured in Solutions magazine © 2015 Manulife.
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