Four investments that help limit risk
1. High-quality fixed income investments
- Fixed income investments, such as bonds, pay back your principal with a guaranteed return, if you hold them until they mature.
- With highly rated government or corporate bonds, there's little risk you will lose money. Government of Canada bonds, for example, are among the safest investments in Canada. They are fully guaranteed by the government. Of course, you'll get lower yields on government bonds than you will on lower rated corporate bonds.
- Fixed income mutual funds also keep risk lower by spreading your risk among many bonds.
2. High quality or preferred shares
Preferred shares limit risk in two ways:
- The dividends on a company's preferred shares must be paid before dividends on common shares.
- Holders of preferred shares are first in line among stockholders to get their money back if the company issuing the shares goes out of business.
3. Investments that guarantee a minimum return
These investments set a limit on what you can lose. Examples include:
- A special type of insurance contract called a segregated fund. You invest in a mix of investments chosen by the insurance company, like you do with a mutual fund. You can choose to insure from 75% to 100% of your principal. The cost rises with the level of insurance you get.
- Many whole life insurance policies let you save and invest part of your premiums. They offer a guaranteed minimum rate of return on this cash value.
- Some GICs are linked to indexes. These can provide 100% safety of principal. What you make depends on the return of the stock market, although sometimes they offer a minimum return guarantee.
4. Index investing with Exchange Traded Funds (ETFs)
- With ETFs, you can invest in a mix of investments, which helps reduce your risk of losing money.
- At the same time, ETFs usually have much lower fees than mutual funds. This helps improve your return.
Remember: Low risk usually means low growth
If you choose to play it too safe, you may not get the growth you need to reach your financial goals. Look for investments that help you balance risk and growth in a way that feels right to you.
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.