High-Risk vs. Low-Risk Strategies

Do you invest based on logic and reason? Or do you make investing decisions with your heart and not your head? A disciplined approach, using logic and reason, is a lower risk strategy.  Emotional investors can be short-sighted and overreact to current events ("But I have to make back what I lost!").

When markets go down and stay down, emotional investors sell out. When the investment goes down, we hear, "I knew I shouldn't have bought in—you can't make money in the stock market."

When markets go up and stay up, emotional investors buy. On the way up, we may hear, "the U.S. market went up 15% last year. It's a good time to buy U.S. stocks, why don't I have more in my portfolio? But let's just watch it a little longer. When I'm convinced it's actually going to stay there, then I'll buy.” Usually, by then, most of the gains have been made.

Your Canadian Equity Fund Drops 20%

What would you do? Find out, try this survey.

Begin

You need to be proactive, use low-risk techniques and stick with them no matter what the markets are doing. Selecting the best investment approach is a challenge for the novice and the experienced investor. Your risk tolerance and capacity will directly influence the type of investment techniques that appeal to you. Before attempting any high-risk methods, revisit your risk capacity. Can you afford a loss? How much should you risk?

Investment techniques range from simple, easy to implement low-risk methods to complicated, high-risk or speculative ones. A comparison is shown in the table below.

Low-Risk Methods

High-Risk Methods

Dollar-Cost Averaging: Purchasing Power at Its Best

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Buy and Hold

  • The idea is to stay invested in specific stocks for a long period of time
  • A modified version suggests staying fully invested in the “market” (not cashing out, only to reinvest later)
  • In non-registered accounts, it prevents triggering capital gains taxes

Market Timing

  • The idea is to “buy low” and “sell high”, but this isn't always easy
  • Few, if any, investors have consistently been successful

 

 

Design Tax-Efficient Portfolios

  • A low-risk method to use when you own several types of accounts (e.g., RRSP, TFSA and non-registered)
  • Build a tax-efficient portfolio by holding your equities and fixed income assets in the most tax-efficient account
  • Tax efficiency is all about saving tax, now or in the future


 

Speculation: Set Up a “Speculative Pool” Account

  • Ask yourself, “How much can I afford to lose?” Set that amount aside for aggressive investing
  • Choose unique opportunities (which you are knowledgeable about) in which you have a direct involvement
  • Give yourself a chance to assess your skills without risking a lot of money
  • Keep the bulk of your investments and the savings you really need in a well-diversified portfolio of investments

Does your Mortgage belong in your  RRSP?

What About in Retirement?

Investing during retirement has its unique challenges. You want to maximize income from your investments but not draw down any of the capital. Sadly, the expression, “You can’t have your cake and eat it too” applies.

Sustainable retirement income is your goal. Discover ways to invest in retirement in Asset Decumulation Strategies.