Three Types of Investment Risk
December 21, 2023
The more you think about investment risk the more you realize the different ways your investment returns might be lower than expected, writes Peter Watson.
The problem with risk is it comes in several different forms.
The first risk is having poor investment returns. This is the one that gets all the attention.
One option is to avoid the potential for a loss and therefore not invest in stocks or at least keep your exposure to stocks very low. That can be done by allocating more of your portfolio to bonds. On the surface, that sounds like a reasonable option.
That takes us to the second risk of not getting high enough investment returns. Bonds are safe but the expected return on investment is low.
Most investors do not have enough money that they can afford to have a large amount of their wealth in a low-risk investment that pays low investment returns. The problem is inflation.
Every year things get more expensive and to maintain your ability to continue your desired level of spending, most people need to grow their investments.
The final risk is you: the investor. Most of us know the best way to invest is to take a long-term approach. In theory this is an easy concept. The reality is it is one of the most difficult aspects of investing.
Emotions often take hold. When your stocks decline in value many sell at a loss and stay out of the market while the stock market recovers.
My suggestion is to consider all the risks of investing and the best way you should manage your investments.
Watson Securities (www.watsoninvestments.com) is a trade name of Aligned Capital Partners Inc. (ACPI). ACPI is regulated by the Investment Industry Regulatory Organization of Canada (www.iiroc.ca) and a Member of the Canadian Investor Protection Fund (www.cipf.ca). Watson Securities is registered to advise in (securities and/or mutual funds) to clients residing in Ontario. This publication is for informational purposes only and shall not be construed to constitute any form of investment advice. The views expressed are those of the author and may not necessarily be those of ACPI. Opinions expressed are as of the date of this publication and are subject to change without notice and information has been compiled from sources believed to be reliable. This publication has been prepared for general circulation and without regard to the individual financial circumstances and objectives of persons who receive it. You should not act or rely on the information without seeking the advice of the appropriate professional.
RELATED ARTICLES