365 days to your richest life: Conclusion to Varieties of Risk
In 1994, author Graydon Watters (Financial Pursuit) wrote that 8 out of 10 Canadians had never invested in the market. By 2000, research revealed that almost 50 percent of adult Canadians owned stock directly or through mutual funds.
One of the risks wreaking havoc in the current interest rate environment is “reinvestment risk.” When we invest in bonds and/or GICs to achieve security of capital, at some point, our terms will mature. If we rely on those investments for income, we may find ourselves living on substantially less than we were prior to maturity. A study by Fidelity Investments of the 34-year period ending in 2002, for example, found that GIC investors received 214 percent less on their reinvested term, on average, than when they initially invested. Ouch!
In the late 70’s and early 80’s, inflation risk was a predominant factor. Somewhat predictably, when interest rates were at their highest, inflation was too, with purchasing power falling by as much as 12.5 percent in one year (1981). Today we have much greater confidence that economic and politic powers can effectively combat hyper-inflation, and demographic trends are also in our favour, i.e., an ageing population consumes less, and lower consumption lowers prices. However, there are still certain wild cards – like oil and gas prices – that are both unpredictable and unmanageable. Unlike market risk, which is reduced with time in the market, inflation risk increases with time. The younger and healthier we are now, the greater the influence of inflation during our lifetime. We can minimise the impact of inflation on our lives, very simply, by owning assets that go up in value as inflation rises – unlike cars, GICs, bonds, and money itself.
Finally, there is shortfall risk—the risk of running out of money before we die. My experience has been that far more Canadians damage their quality of life by worrying about running out of money than actually experience that remote eventuality, but since the antidote for one happens to also be the antidote for the other, I’m happy to help you overcome both.
Although the straight-forward, laddered GIC portfolio many risk-averse investors have chosen may seem like the lowest-risk way to build wealth and prepare for retirement, it really only provides protection from two of the six kinds of risk we face. A truly low-risk strategy is one that balances all of these risks, providing as much protection as possible against them all. That’s what we’re here to do.
In order to give you a clear path once you begin, however, let’s start by clearing up some of the money and investment myths that may be standing in your way right now.