7.2.4 Risk and your risk tolerance
When you look at your investment options, consider both the risk characteristics of a particular investment and your risk tolerance.
Risk means that you might make high returns or you could lose your money. Your risk tolerance describes how comfortable you are with the uncertainty in your investments. Are you comfortable not knowing what you will make from your investments? How well can you handle losses if your investments lose value?
Before investing, be sure you understand your tolerance for risk and ensure that your investments match your tolerance for risk.
The following chart compares the risk characteristics of three typical products:
- Equities or stocks (in this case, an investment fund that holds the largest stocks on the Toronto Stock Exchange). These move up and down in value and are therefore riskier. However, stocks offer the potential for higher returns and can be a good choice if you have a high risk tolerance and plan to keep the investment for several years.
- Bonds (for example, an investment fund that holds Canadian bonds). These change in value less than equities do, and are generally less risky than equities. They can provide you with a steady cash flow rather than high returns.
- Guaranteed investment certificates (GICs). They offer the lowest risk and a lower return. The rate of return (in this case, the interest rate) is known in advance and can provide guaranteed returns.
In general, understanding the risk characteristics of investment products can help you choose investments that match your risk tolerance, as well as your financial goals, age and investment timeline. If your portfolio contains a combination of assets, the risk of each asset must be considered together with the entire portfolio. A professional investment advisor can help with this.
Text version: Risk
All three investments start at $10,000. Over time, the exchange traded fund moves up and down in value. Its value rises the most rapidly but also goes through some large falls. The bond has smaller rises and falls in value, while the GIC moves up in value at a slower, steady pace.
|Investment type||Net percentage return over 10-years||Price of shares over 10-years|
|Exchange traded fund tracking the Standard and Poor's Toronto Stock Exchange Composite Index (S&P/TSX)||6.68%||$18,454.64|
|Canadian bond mutual fund||6.01%||$16,136.62|
|5 year guaranteed investment certificate (GIC)||3.25%||$13,847.66|
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