Wealth Insights - February 2017

Wealth Insights

February 2017

Professional advice: A winning combination for managing risk

When we think of risk, we tend to focus on the possibility of losing money in the markets. But every investment has its risks. Even investments that seem completely safe like Guaranteed Investment Certificates (GICs) come with some risk — notably; will they keep pace with the cost of living?

Here's a look at the main kinds of risk — and how a proper investment strategy can help protect against them.

  • Market risk - Also called market volatility, this type of risk is associated with investing in the stock market. It includes any event that can depress the markets, such as war or political turmoil, as well as events that can depress specific industries — such as the airline industry after 9/11.
  • Managing market risk - Diversification is the best way to protect against market risk. By holding a number of investments, we reduce the effect of a decline in any one. In fact, that's a main reason why so many investors choose mutual funds in the first place. A mutual fund provides much greater diversification than any individual investor could achieve.
  • In addition, we can diversify your portfolio with equity funds providing growth potential, bond funds adding stability, and cash equivalents giving you security and liquidity. If the equity portion of your portfolio is declining, cash and bonds may take up the slack.
  • Company-specific risk - Also called “business risk,” this type of risk refers to any event or trend that affects a specific company in any industry. Examples include the failure of a major project or product, or changes in leadership.
  • Managing company risk - Mutual funds are one of the best ways to manage company-specific risk. Rather than buying the stock of one or two companies, a broad equity fund will invest in numerous companies. In addition, fund managers typically conduct rigorous company analysis before they invest and on an ongoing basis afterward.
  • Inflation risk - Inflation risk is the risk that rising prices for goods and services will erode the value of your savings. In Canada, inflation has been low for the past few years. However, over the long term, the effects of even moderate inflation become evident.
  • For example, the average annual rate of inflation over the past 35 years is 3.04%. That means a basket of goods and services — including food, housing, transportation, furniture, and clothing — that cost us $100 in 1980 would set us back $294 today.1
  • Managing inflation risk - Historically, equity mutual funds have outpaced inflation better than fixed-income or money market funds. While they are subject to short-term volatility, they offer us the potential for greater growth over the long term.
  • Currency risk - Fluctuating currencies can affect the value of your investments when they are converted back into Canadian dollars. We have seen this in the past few years, as the Canadian dollar has fallen against the U.S. dollar.
  • Managing currency risk - Diversifying internationally can help reduce currency risk. A global mutual fund, for instance, will invest in a number of countries and gain exposure to a basket of currencies. This can help reduce the impact of currency fluctuations on your portfolio.

You can also take advantage of currency-neutral funds, which invest in U.S. or international markets but eliminate currency risk by hedging returns back into Canadian dollars.

Putting theory into practice - Working together, we can find the right amount of risk you're comfortable with so you can take advantage of the growth of the markets over time.

Get the right advice.

Your Credential® advisor at Westminster Savings is responsible for acting in your best interests, making recommendations consistent with your objectives and risk appetite. But remember, it's a partnership. Want to learn more about what we can do for you? Call us at 604-517-0100 or send us your question online and we'll respond to you within one business day.




Mutual funds are offered through Credential Asset Management Inc. and mutual funds, financial planning and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, cash balances, mutual funds and other securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. Mutual funds and other securities are not guaranteed, their values change frequently and past performance may not be repeated. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual funds and other securities. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax related matters. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund. ®Credential is a registered mark owned by Credential Financial Inc. and is used under licence.