Flash Retirement

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.

A Léger Marketing survey conducted in 2002 for the Commission des valeurs mobilières du Québec (CVMQ) showed that half of all investors over the age of 50 would accept greater risk with their investments, when in fact their priority should be protecting their estate.

Sixty percent of investors over the age of 50 believe they have intermediate or expert investment management skills. At the same time, they don't have much interest in the matter. Nearly 3 out of 5 respondents said they were minimally interested or not interested in learning more, and the same proportion was indifferent or considered investment management boring.

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
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


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!

This text is intended exclusively to provide general information on financial security at retirement. This information may not be appropriate to the reader who wishes to obtain particular information on one of the treated subjects and cannot be a guarantee for results. It is up to the reader to make pertinent expert advice requests. This information capsule does not bind partner providers of these information.

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