Managing Investment Risks

Market risk is not the only thing against which you should defend your investments

When you think about the risks of investing, the first thing that probably comes to mind is market risk: the possibility of losing your money because of a drop in the market. You can try to defend yourself against market risk by diversifying your assets, spreading them among stocks, bonds and money-market funds, to increase your chances of having at least some winning investments each year. But there are other, possibly less obvious risks that you should keep in mind.
 

Inflation risk: Whatever return your money earns will likely be eroded over time by inflation. Even a 2.5% inflation rate will eat into your retirement nest egg. If that rate were to persist for 25 years, you would need $185,000 to buy what $100,000 buys today.

Defence: You are already helping to protect yourself from business risk by investing in mutual funds, whose assets are diversified among dozens of companies.
 

Business risk: This is the possibility that a company in which you invest will go bankrupt, or at least see its stock price plunge, reducing the value of your investment.

Defence: You are already helping to protect yourself from business risk by investing in mutual funds, whose assets are diversified among dozens of companies.
 

Tax risk: How much you really make on your investments is greatly affected by how much you have to pay in taxes on them.

Defence: Make maximum use of your tax-deferred RRSP, RESP or Tax Free Savings Account (TFSA). They allow your money to build over time, with no taxes due until you begin withdrawing it at retirement or for the purpose for which you'd been saving-at which time it may be taxed at a lower rate.
 

Risk of outliving your money: The scariest risk of all is not having enough money to last through your retirement years.

Defence: Contribute the maximum each year to your RRSP. The maximum contribution limit for 2012 is $22,970, but you may be able to contribute more if you have unused room from previous years.