The risk of not taking risk - Fiscal Agents Money Management Newsletter

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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