Potential solutions to minimize investor risk

October 1, 2017

In business and investments, a greater gain can be accompanied by greater risk. Important risk factors are examined below, along with constructive ways to deal with them. Any successful business person or investor will tell you, “There is no such thing as gaining wealth without risk.” In fact, within any business or investment, risk generally increases when the potential for gain is greater. Most people want to invest for peace of mind so that they can live well today and thrive tomorrow.

 

Investing in equity investment funds is similar to investing in any given business because such funds invest in the stocks of many businesses. If a business succeeds, its stock will increase in value and pass that value onto the shareholders. Similarly, if many companies’ stocks increase in value in an equity fund over time, the investor’s wealth can increase.

Because economic performance is uncertain, an investor who seeks growth by investing in the ownership of companies via equity investment funds cannot have zero risks. Here are the main risks involved in investing:

Consider: Interest rate risk, when increasing, could negate gains of certain income funds investing in bonds.
Solution: Maintain a balanced portfolio including equity funds along with different types of income funds: money market, short-term bond, and long-term bond funds with the potential for interest rates to rise factored in.

Consider: Business failure risk could deplete the value of any one company’s stock. This can occur if an investor focuses on buying one or a few stocks or one business sector (for example, uranium stocks have slumped for several years). When a company goes out of favour in the marketplace, when the demand for their products diminishes, its value can dive. This happened with Blackberry’s mobile phone demand and its market valuation loss.
Solution: Consider investing in equity investment funds because they hold many different stocks.

Consider: Purchasing power risk is an alarming reality faced by everyone due to inflation’s historical average which has been between 3% and 4%.
Solution: Calculate inflation into your retirement planning and consider investing in equity investment funds over the long term, with the potential to build sufficient wealth to meet increased future budget demands due to inflation.

Consider: Market risk occurs because markets are cyclical, rising, correcting, and occasionally
declining.
Solution: Diversify your funds, investing in different asset classes, as not all market sectors move together. Consider investing more in money market and dividend funds (such as equity funds holing Canadian banks).

Consider: Opportunity risk occurs when you cannot move to invest your money for a potentially better return, such as when you are overly invested in a locked-in type of investment, such as term deposits, or have tied up your income in monthly payments.
Solution: Try not to lock up all of your money, keeping some in money market funds over any given period.

 

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