When it comes to investing, there’s usually some risk involved.  Certain options carry a greater degree of risk than others.  Still, even the supposedly safe options are not entirely without risk, even though we don’t like to think of them as risky.  The key to keeping your investments as safe as possible lies in asset allocation, which creates a balance of riskier and safer investments.  This article talks about some of the basic principles.

Why take more risk?

Many take investment risks because higher risk tends to come with the possibility of higher pay-off.  While there are never any guarantees, stocks with higher risk also have a chance of yielding higher gains.  If you’re primarily interested in growing your money, having a good proportion of stocks and mutual funds can help you increase the value of your assets.

Why play it safer?

On the other hand, there are options that are traditionally viewed as safer.  Among them are money market funds as well as certificates of deposit.

On the plus side, your investments in these categories are much less likely to lose money. In fact, with certificates of deposit, you’re guaranteed the return you signed up for.

However, you can still lose money – because of inflation and/or taxes.

Just look at what happened to interest rates over the last few years?  Right now, they are so low as to be practically negligible.  So if you invest in any of the “safe” options, your money won’t likely be growing right now.  It won’t disappear overnight either, but over time, as inflation rises again, you may find that it’ll be worth less and less.

As you can see, there’s a certain degree of risk involved even in the “safe” options.  So what can you do?

Asset allocation

Asset allocation is a key part of building a portfolio that balances risk with growth.  You simply don’t put all your eggs in one basket.

Which particular assets you choose, and in which proportion, depends on your priorities and what professionals call your Investment Risk Profile.  Do you want to play it safe – maybe because you’re retired or close to retirement?  If so, you will likely want to keep most of your assets in the safer categories.  The downside of going too far into this direction is that there is less potential for growth, and you may end up running out of funds while you still need them.

On the other hand, if you were to create a portfolio that is too risky, you could run out of funds as well, but in a more unpredictable way.  That’s what some people without good asset allocation have been dealing with over the last several years.  The funds that had been doing well suddenly lost a large proportion of their value. Retirement accounts that had a large allocation in the market took a nosedive.  Many people who needed to take money out at that point, found themselves in an uncomfortable position. Not only were their investments worth less than they had expected, but a withdrawal now meant a much larger percentage of available assets.

That’s why it’s a good idea to plan, and planning means having an asset allocation strategy that matches your risk profile.  Not just when you set up your portfolio, but over time as well.  If you know you may need access to your money within the next few years, keep a portion of your investments in those “safer” categories.  That way, you can access them without too much damage to your account no matter what the stock market does.

Are your assets diversified sufficiently?  Does your asset allocation strategy match your risk profile?  If you have questions or would like to sit down and discuss your situation, please call me (604 833 0348) or send me an email (Lynn@LifestyleProtector.ca). I’ll be happy to talk with you.