Understanding your investment risk

When you think about the risk associated with investing, you’re likely focusing on the possibility that your portfolio could decrease in value.

And of course, it is important to correctly determine your tolerance for market volatility and to diversify your investments accordingly.

But there are other forms of risk that should also be kept in mind.

The first is inflationary risk. If the value of your investments increases more slowly than the cost of living, your purchasing power will decline. Investments considered safe, but with low returns, may be exposed to this type of risk.

Longevity risk is the danger of outliving your capital due to a lack of adequate savings or to insufficient returns.

One that may be underestimated is liquidity risk. Some investments lock in your capital. In the event of an urgent need, you might find yourself having to sell at too low a price, or unable to sell when you want to. 

Lastly, the performance of two assets with similar returns might look very different after taxes, depending on the kind of income they generate and the type of investment account involved: this is the risk of tax inefficiency. 

As we can see, risk management goes well beyond market volatility alone. Your advisor can help you keep track of your risk levels and find the right balance between prudence, performance and long-term goals.

The following sources were used to prepare this video:

Autorité des marchés financiers, “Saving plans”; “4 steps to plan for retirement”; “Inflation and its impacts on your finances”; “Your investor profile.”

Fidelity, “How to invest tax-efficiently in a non-registered account.”

Investopedia, “Understanding Inflationary Risk and How to Mitigate It”; “Tax-Efficient Investing: A Beginner's Guide.” 

OCRI-CIRO, “Understanding Risk.”

Retraite Québec, “Understanding the financial risks related to retirement.”