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 The
Money Management Newsletter: RSP
Planning
The risk of not taking risk
Money Management Newsletter - May 1997
You may think the best way to be financially secure
is to take no risk whatsoever with your hard-earned money. It may seem
odd, but this no-risk strategy can be one of the riskiest approaches you
can take. In an effort to eliminate risk entirely, you give yourself a
false sense of security and you sacrifice real growth-growth that outpaces
inflation.
Why? Because leaving your money in a savings account or even in guaranteed
investment certificates (GICs)
may keep your money safe, but it almost certainly won't grow enough to
meet your future needs. The returns offered by low-risk investments are
often barely enough to keep up with inflation.
So the real risk is not taking at least some risk with your money. That
doesn't mean gambling everything you own. It means putting at least some
of your money into investment which, over the long run, do better than
savings accounts and term
deposits such as GICs. The problem is that most people are afraid
to take any risk.
You'll never eliminate risk entirely, but you can evaluate it and manage
it by thinking
long term, diversifying,
using professional money managers and keeping a level head. While you
may find it difficult to keep cool when you hear negative news about the
economy, interest rates or the stock market, remember that bad news sells.
The 1987 stock
market crash created an avalanche of news coverage. But when the market
recovered in less than a year, that fact was barely mentioned.
If you shudder at the thought of the stock market, equity mutual funds
are an ideal vehicle for reducing risk over the long term. They're managed
by professionals whose job is to seek out and analyze opportunities on
your behalf. They can be tailored to fit your risk
tolerance and they offer diversification, which means one lower-performing
stock doesn't bring the others down. In addition, they can outpace inflation.
Over the long term, well-managed equity mutual
funds have outperformed less "risky" investments.
Remember that the stock market is just a store where the prices go up
and down, It's not the stock market that's scary, it's the behavior of
investors.
Investors who panic and sell because the market is down are running from
the store when there's a sale on. And if they go shopping when the prices
are up, they're lining up to pay more. You wouldn't do that if you were
buying clothes of food, so don't do it with your money. Stocks have outperformed
over the long term.
While the stock market fluctuates from day to day, over the long term
stocks have outperformed all other investments. So if you're investing
for the long term, consider having a portion of your portfolio invested
in stocks.
Performance Comparison: January 1938-December 1994
| Rate of
Return % | Value of $1,000
Invested | | Inflation | 4.39 | $11,062 | | Treasury bills | 5.41 | $19,138 | | Long-term bonds | 5.44 | $19,469 | | Stocks | 10,67 | $291,637 |
Source: Canadian Institute of Actuaries * * *
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