Investing your money - how do you define risk?
I don’t gamble with money. I hear the stock market is risky and I stay away from mutual funds because I don’t want to lose money. These are common statements I hear when I tell people what I do for a living. People generally don’t take risks but what they consider safe may actually be a risky investment. Most define risk with reference to valuation of their investment and a GIC or a term deposit is the simplest kind. If you invest $1,000 into a GIC at a 2% interest rate for one year, your investment is guaranteed to be worth $1,020. If you invest $1,000 into market-based investments like mutual funds, you’ll buy a number of units with no interest guarantee. If the unit price is $10, you own 100 units in the fund. The price of those units fluctuates daily based on the price of underlying securities that the mutual fund is invested in. If the unit price goes up to $10.20, your investment would be worth $1,020. If the price goes down to $9.80, your investment would be valued at $980. So are GICs “safe” and mutual funds “risky”? The answer depends on your definition of risk. If you only consider the certainty of the future value compared to your initial investment, then mutual funds are risky because future value can’t be guaranteed, like a GIC. Keep in mind- inflation should be considered as a risk factor while assessing the suitability of any investment. GIC rates have been on the decline for the last couple of decades. According to the Bank of Canada, the average five-year GIC rate for the 10-year period from 2006-2016 was 2.01%, while average annual inflation was 1.66%. This means GIC investors made only 0.35% annually after adjusting for inflation. On the other hand, S&P TSX index, used as a proxy for market-based investments, has provided average annual returns of 4.7% for the same period according to TaxTips.ca. After adjusting for inflation, these investments have provided real returns of 3.04% annually- over eight times better performance than GICs. Based on this scenario, it’s clear the investor takes on a greater risk of not meeting their goals if they only invest in GICs because actual price increases for many items tend to be much higher than the average rate of inflation. Both GICs and mutual funds have a place in your portfolio. The magic word is diversification and the recommended mix of GICs and mutual funds is different for everybody. At FirstOntario Credit Union, our advisors specialize in investment planning and can help you design a strategy to maximize your benefits and get the most out of your money. Visit www.FirstOntarioInvestments.com for more information. *Mutual Funds are offered through Credential Asset Management Inc. and Mutual funds, other securities and financial planning are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual funds, other securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. Mutual funds and other securities are not guaranteed, their values change frequently and past performance may not be repeated. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.