Your Investment Risk Tolerance
How Much Risk Can You Live With?

If you chose to go for a medium risk investment, you are looking at the possibility of losing 15% of your investment on any given year. If that is still too much risk for you, you can opt for a low risk investment. With high quality low risk investments, you can potentially lose 5% of your investment in a bad year, but fortunately, that doesn’t happen very often.

The percentages in this simple illustration aren’t set in stone. These are just rough numbers based on the last 50 years. You could lose more or less than these estimates, but the idea here is to inform you of what can happen—and what will happen from time to time. If you invest in any investment category for a long enough period of time, you should experience some losing years with losses that are comparable to this illustration. However, most people in the investment community generally say that if you hold on to a quality investment for a long period of time, you should earn a good rate of return. No one can guarantee this, but this seems to be the way things have generally worked out over the past hundred years.

If you don’t want to expose yourself to any risk, then your safest bet is to invest in government bonds. These pay the lowest rates of return, but they are the safest investments. The next safest investment would be in term deposits from your bank or credit union. An important concept to be aware of is that no investment is without risk. Governments can collapse or lose investor’s confidence, banks can fail, and companies can go bankrupt. When it comes to investing money, there is truly no such thing as a safe investment. Every investment has risk. Some investments have very low amounts of risk compared to others, but no investment can be called completely safe.

In the business world, risk is measured by credit ratings. The better credit rating a business has, the less risky it is perceived to be. Governments usually have the best credit ratings because if they need more money, they can either raise taxes or print more. Large banks are often next in line with the next best credit ratings, and then credit ratings move down from there. Below is a table that illustrates how credit ratings generally compare among different organizations. You will notice that the better credit rating an organization has, the less interest it has to pay to attract peoples’ investments. Everybody knows that there is less risk involved in investing in Government of Canada bonds than there is in investing in bonds of public or private companies. Credit ratings reflect this knowledge and so the Government of Canada doesn’t have to offer investors as much interest as a company would because investing with the government investment involves less risk than investing in a company.