Risk and return: what investment risk is and how to use it
There’s a basic investment principle of risk and return: higher risk brings higher returns, and lower risks bring lower returns. So the “riskier” the investment, the more likely it is to either make or lose a lot of money.
To see an appreciable return on investment, you have to be willing to accept a certain level of risk. To help you decide, we’ve developed a tool that will tell you exactly what level of risk you are willing to accept in your investments. Before you give it a try, have a look at the options that are available to you only from an insurance company.
Why your risk automatically goes down with segregated funds
Only an insurance company can sell you segregated funds, which offer a guarantee on all or most of your initial investment, depending on what plan you buy. This means that whatever fund portfolio you choose, your capital is still protected. This makes segregated funds an ideal investment instrument for the normally conservative investor.
How investment styles vary
Investment styles are represented on a sliding scale from Very Conservative to Very Aggressive, with several styles in between. A Very Conservative fund portfolio will choose lower-risk investments that will typically realize a modest increase over time. A Very Aggressive portfolio will choose higher-risk investments that will be subject to more ups and downs than the Very Conservative portfolio.
How diversification helps manage risk
Choosing a variety of investment options is always a good investment principle. Successful investors often have a mix of aggressive and conservative assets in their portfolios. A typical investor may have their RRSPs locked into segregated funds with an insurance company to keep their retirement savings secure, but also trade online stocks for more short-term gains. Diversification ensures protection for your investments by building firewalls that shield you from the effects if an investment method turns negative.
Your investment style and risk