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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 TypeCapital Security Protection from InflationIncomeGrowthLiquidity
Savings accounts ExcellentWeakFixed, very stable, low NoneGood 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!

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