Return and Risks of Different Investments
Some investors don't take enough care in selecting their investments, despite the fact that the relationship between risk and return is the cornerstone of long term financial security.
Understanding the relationship between risk and return will help you...
- Make choices that fit with your investor profile
- Ensure long term financial security
- Minimize emotional factors and gain peace of mind
- Navigate through increasingly complex investment products
- Compare the pros and cons of an investment
- Establish the best possible balance for each situation
- Better protect the estate you wish to pass on to your heirs
- Properly assess the quality of an investment
Remember: The lower the risk of an investment, the lower its return potential, and vice versa.
Look at this summary table for a better understanding
Investment Type | Capital Security | Protection from Inflation | Income | Growth | Liquidity |
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Savings accounts | Excellent | Weak | Fixed, very stable, low | None | Good to excellent |
---|
Money market securities (treasury bills, money market funds) |
Good to excellent |
Weak to average |
Fixed, very stable |
Generally none |
Very good |
---|
Government bonds (federal, provincial, municipal) |
Good to excellent |
Average |
Fixed, very stable |
None |
Good to very good |
---|
Preferred shares |
Good to average |
Average |
Relatively fixed |
Negligible |
Good |
---|
Common shares |
Weak to moderate |
Variable |
Variable |
Moderate to excellent |
Relatively good to very good |
---|
Corporate bonds |
Good to excellent |
Average |
Fixed, very stable |
Generally none |
Good |
---|
Mutual funds |
Weak to average |
Variable, generally good |
Variable |
Moderate to excellent |
Good |
---|
Indexed term savings |
Excellent |
Good in the long term |
Only known at maturity |
Good |
Weak |
---|
Debentures |
Good to average |
Good |
Variable |
Generally none |
Good |
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Be Careful!
- Don't hesitate to consult a financial planner.
- High return means high risk! Any compromise requires sacrifice either on the expected return or the degree of risk. A term deposit with a 10% rate of return is not likely to come your way!
- Be wary of any claim of phenomenal return at no risk, especially after you've retired. Lofty promises should always prompt you to ask questions.
- Invest only in what you know. If you don't understand, ask questions and do your research.
- Age is not the only factor, although particular caution is called for around the age of retirement.
- If an investment keeps you up at night, don't purchase it.
- Watch out for inflation and, in some cases, administration fees that eat away at your investment.
- Don't purchase an investment solely because of its tax benefits.
- Don't risk losing it all. An illegal investment that saves you taxes could very well cost you much more than what you put in!