What are three big risks for investors?
1. Risk of a bear market
It's a bear market when...
- There is general doubt about the health of the economy.
- The prices of stocks are falling.
It's a bull market when...
- There is general confidence in the health of the economy.
- The prices of stocks are rising.
There's no guarantee where prices will go, but if you can wait out a bear market, you are likely to get a good return. Over time, stock market returns usually beat out other investments. The gains have averaged out to around 10% over the long term.
Remember the crash of October 1987? Prices of stocks dropped sharply, but eventually bounced back. A lot of people lost money because they panicked, sold their investments, and took the loss. Three or four years later, most of those who held onto their investments ended up well ahead of where they were before the crash.
If you aren't comfortable with price swings, you may want to avoid the stock market. You do have other choices to invest your money. Never take on more risk than you can live with comfortably.
2. Risk of a bad investment
It's easy to make mistakes investing, especially if you get caught up with growing your money too quickly. You could even fall for a scam. If you are worried about losing money, avoid buying:
- Stocks with an inconsistent record of hitting their projections
- Mutual funds that invest in stocks that have not done well in the past
- Bonds from companies that are having problems paying their debts
When you invest in a successful company with good prospects for growth, there's less risk you'll lose money than if you choose one that's just getting started or struggling to survive.
3. Risk of falling behind
It can be quite hard to keep your money totally safe and grow it fast enough to keep up with inflation. Inflation means your dollar will buy less in five years than it does today. If you don't think about this when you invest, you can fall behind and not realize it.
The safest investments, like Canada Savings Bonds (CSBs), make somewhere around 3%, on average, today. Although there's almost no risk, there's not much growth either.
Remember: There's no such thing as a completely risk-free investment
The important thing is to understand the risks you're taking before you invest so you can make informed choices.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.