March 2008

Vol 7 - No. 9
 

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Your Money | March 2008

 


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Ready to Invest? Find the Right Amount of Risk First

 

When the markets are volatile, many investors consider moving into safer investments. The thinking is that, when conditions in the markets improve, they will move back into stocks. But it's important to understand that this strategy natural enough given the market's ups and downs comes with its own risks.

 

Trying to time the markets is a risky proposition. If you sit around waiting for the best time to reinvest, chances are that you may miss the boat and end up on the sidelines while the market climbs.

 

A better strategy is to build a diversified portfolio, take a long-term view, and maintain your discipline. To find out how, click through the links below: 

   The lowdown on investment risk

Each of the three main classes of investments cash, fixed-income, and equity-based has a role to play in a diversified portfolio. Each also comes with its own brand of risk.

Cash-type investments, which are the most secure, include Guaranteed Investment Certificates (GICs), money market funds, and high-interest savings accounts. Fixed-income investments include bonds, mortgages, and longer-term GICs. Equity investments, which are the most volatile, include stocks and stock mutual funds.

 

Cash-type investments provide security and liquidity. If you were to build your entire portfolio around these types of investments, you would experience no financial-market risk. But your portfolio would be vulnerable to inflation the risk that the cost of living will outpace your savings. To put this in terms most of us are familiar with, consider what you paid for a college or university education, and think of what it would cost you today.

 

Tip: Cash investments are good for short-term savings goals and building an emergency fund. Holding some cash can also help the enterprising investor take advantage of opportunities following market declines.

 

Fixed-income investments add stability to your portfolio. When stocks are experiencing turbulence, bond markets often benefit. With their ability to help preserve capital and provide a fixed rate of return, most investors benefit from including bonds or bond funds in their portfolios. But these investments also come with risk most notably, that interest rates may rise. In this case, you would be left holding a security or securities that pay less than the going market rate.

 

Equity-based investments provide growth potential. Fluctuating stock markets may grab the headlines particularly when the moves are down but the fact remains that equities are your best bet for growth over the longer term. Historically, equities have provided the best investment returns.

 

By taking on some additional risk in the short term, you increase your chances for success over the longer term. What's more, the longer you hold your equity investments, the less risk you will face over time. This knowledge can help you put the market headlines in perspective.

 

The comfort zone

 

Most of us could benefit from holding a mix of the major asset classes in our portfolios. This is the idea behind diversification one of the cornerstones of sound investing. If the equity portion of your portfolio is declining, cash and bonds may be taking up the slack. The precise mix that's right for you will depend on your goals, time horizon, and tolerance for risk. 

Did you know... Most financial institutions and financial planners have tools that can help you determine an asset allocation mix that's right for your personal goals.

 

You should not only assess your comfort level with stock-market volatility, but also revisit it now and again. For instance, if market volatility makes you nervous a good test is whether it keeps you up at night chances are that you may benefit from a more conservative asset allocation (more cash and bonds).

 

The best strategy, as always, is to build a diversified portfolio of sound investments, based on a plan that reflects your goals and comfort level. For most of us, it's long-term success that counts, not guessing which sector or stock will be the next big thing. A disciplined strategy can help put the odds of investment success in your favour.   

 

[Source: Scotiabank My Vault]

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