Page 34THE OSCARlOCTOBER 2013FINANCIAL PLANNINGHow Should Your Risk Tolerance Influence Investment Decisions?By Bob JamiesonAs an investor, how much riskcan you tolerate? It’s an importantquestion — because the answer canhelp you make the right investmentchoices.Before you know your risk tolerance,you’ll want to make sure youfirst understand the nature of investmentrisk — the risk of losing principal.This risk is especially prevalentwhen you invest in stocks, becausestock prices will always fluctuate —and there are never any guaranteesabout performance. Of course, adecline in value does not mean youneed to sell; you can always hold onto the stock with the expectation thatits value will bounce back. And thiscan certainly happen, but again — noguarantees.How you respond to this type ofinvestment risk will tell you a greatdeal about your own risk tolerance.Of course, no one, whether he or shehas a high tolerance for risk or a lowone, particularly likes to see declines.But people do react differently. Ifyou’re the sort of person who canretain your confidence in your investmentmix and can focus on the longterm and the potential for a recovery,you may well have a higher tolerancefor risk. But if you find yourselflosing sleep over your losses (evenif, at this point, they’re just “paper”losses), becoming despondent aboutreaching your goals, and questioningwhether you should be investing atall, then you may have a low tolerancefor risk.This self-knowledge of your ownrisk tolerance should help informyour investment decisions — to apoint.Even if you determine you have ahigh tolerance for risk, you almostcertainly should not load up yourportfolio exclusively with stocks. Ifthe stock market enters a prolongedslump, you could face heavy lossesthat may take many years to overcome,causing you to lose significantground in the pursuit of yourfinancial goals. Conversely, even ifyou discover you don’t have muchtolerance for risk, you may not wantto invest only in supposedly “safe”vehicles, such as Guaranteed IncomeCertificates (GICs). During thoseperiods when rates on GICs andsimilar instruments are low, as hasbeen the case in recent years, yourinterest payments from these investmentsmay not even keep up withinflation — meaning that, over time,you could end up losing purchasingpower, which, over the long term,can be just as big a risk as marketdeclines.Ultimately, then, you’ll probablywant to let your risk tolerance guideyour investment choices — but notdictate them with an “iron hand.” So,if you believe you are highly tolerantof risk, you might have a somewhathigher percentage of stocks in yourportfolio than if you felt yourself tobe highly risk-averse — but in anycase, you’ll likely benefit from buildinga diversified portfolio containingstocks, bonds, government securities,GICs and other investments. Whilethis type of diversification can’t guaranteeprofits or protect against loss, itcan help reduce the effects of volatilityon your portfolio.By knowing your own risk tolerance,and the role it can play in yourchoices, you can help yourself createan effective, suitable investmentstrategy — one that you can livewith for a long time and that can helpyou avoid the biggest risk of all: notreaching your long-term goals.I would be glad to assist you inreviewing your portfolio and analyzingthe different risk characteristics.Please give me a call at 613-526-3030.I’m Getting an InheritanceProvided byLinda M. HancockHave you ever met an ‘averageperson’? Neither have I. But, for thesake of argument, let’s say you’re the‘average Canadian’ and you’re gettingan inheritance. If so, that inheritanceis not likely to be large, to helpyou make the most of that inheritance,here are some suggestions youmay find helpful:• Understand what you’re getting.Is your inheritance in cash orinvestments that are liquid? Maybeyou’ll be receiving tangible assetssuch as land, buildings or art thatmay take time to sell or that you willwant to retain. Has the inheritancebeen bequeathed directly to you orwill it be held in a trust that you donot control?• STOP and take stock. Draw upa budget of your immediate incomeneeds and your future income andcapital needs based on your goalsand dreams. Ensure proper asset allocation– meaning that money youneed in the near future should not beplaced in an investment that locks itin for a long time or that would besubject to redemptionfees should youneed the funds beforethe ‘locked-in’ periodexpires.• Repay nondeductibledebt. Usesome or all of yourinheritance to repaydebt on which theloan interest is not taxdeductible. Start withdebt that carries thehighest loan interestrate.• Top it up. If youhave investmentsheld within RRSPs orTFSAs with unusedcarry-forward room,fill it up.• Send your inheritanceto school. Contributeto investmentsheld within RESPs topay for your children’sexpensive (and necessary)post-secondaryeducation.• Invest in yourretirement/estate.Look carefully atsuch tax-advantagewealth accumulationvehicles such as Corporate ClassMutual Funds (that allow you toswitch between different investmentswithout triggering capital gains at thetime of the switch) and PermanentLife Insurance (if you need it) whichcould provide tax-free funds at acritical time or a source of investmentincome to replace an income that isno longer there.• Know your relationship rules.In many provinces, gifts and inheritancesare exempt in the case of separationor divorce. But – if you investyour inheritance in joint names withyour partner or in a family home orcottage, or use the funds to pay downdebt on jointly held property and thenseparate, the assets may become fullysharable. You may want to keep propertyand other investments separatefrom other family investments/assets.What you do with your inheritanceis up to you, but to be sure your decisionsfit your unique situation, talk toyour legal and professional advisorfirst.This column, written and publishedby Investors Group FinancialServices Inc. (in Québec – aFinancial Services Firm), andInvestors Group Securities Inc.(in Québec, a firm in FinancialPlanning) presents generalinformation only and is not asolicitation to buy or sell anyinvestments. Contact your ownadvisor for specific advice about yourcircumstances. For more informationon this topic please contact Linda atLinda.Hancock@investorsgroup.comor (613) 798-7700 Ext. 240.
THE OSCARlOCTOBER 2013Page 35FINANCIAL PLANNINGPanic Doesn’t PayBy Rick Sutherland, CLU,CFP, FDS, R.F.PThe US market dropped about 5%during the month of August. Thiscaused memories of 2008-2009 tosurface. Some investors began to feelanxious and wanted to make decisionsabout how to protect themselvesagainst losses. People oftenfeel tempted to alter their investmentplan in an attempt to avoid loss duringmarket declines. Historical datahowever, shows that this strategytends to backfire.Fidelity Investments recentlyconducted a study of actual results oftheir client portfolios with the viewto understand whether attempting totime the market really works. Theylooked at three sub groups over theperiod from the fourth quarter of2008 and the first quarter of 2009,near the bottom of the market downturn,until the first quarter of 2013,which was the market high at thetime of the study.The first group sold all equities inthe fourth quarter of 2008 or the firstquarter of 2009. This group remainedout of the equity markets as of thefirst quarter 2013. The second groupsold all equities in the fourth quarterof 2008 or the first quarter of 2009and then came back into equitiesprior to the end of the first quarter of2013. The third group did not sell anyequity holdings and remained investedin equities throughout the periodup to the first quarter of 2013.The results were significant. Thefirst group, who sold their equityholdings and stayed out, saw theirinvestments grow by about 15% overthis time period. The second group,who sold their equities and thenlater reinvested back into equitiessaw their investments grow by about50% and the third group, who stayedinvested in equities, saw their investmentsgrow by almost 85% over thissame time period. Results did varysomewhat based on the total allocationto equities. Higher bond and cashallocations tempered the growth.We looked back at our articles thatappeared in OSCAR during the lastquarter of 2008 and the first quarterof 2009. Our essays had a “don’tpanic - stick to your plan” strategythroughout this period of dread andpanic. Those who followed this adviceshould have reaped the benefitssimilar to those in the third group ofthe Fidelity study.There will be another significantmarket decline at some point in thefuture, and it may be sooner than youwould expect. When the next significantmarket setback occurs, and wepromise you it will, we encourageyou to read our short essays here inOSCAR. We will be recommendingthe same strategy. Don’t panic,remain calm and stay invested to suityour objectives and plans. Better yet,if you have the resources, continueto invest. Significant market setbackshave always gone down in history asprudent buying opportunities for thefuture.The foregoing is for general informationpurposes and is the opinion ofthe writer. This information is notintended to provide personal adviceincluding, without limitation, investment,financial, legal, accountingor tax advice. Please call or writeto Rick Sutherland CLU, CFP, FDS,R.F.P., to discuss your particularcircumstances or suggest a topicfor future articles at 613-798-2421or E-mail rick@invested-interest.ca. Mutual Funds provided throughFundEX Investments Inc.PERSONAL FINANCIAL PLANNINGAre you uncertain about achieving your financial goals?Call today for your free, confidential, second opinion.RICK SUTHERLAND, CLU, CFP, FDS, R.F.P.1276 Wellington Street <strong>Ottawa</strong>, ON K1Y 3A7613-798-2421email: rick@invested-interest.caweb: www.invested-interest.caMutual funds provided through FundEX Investments Inc.OUR OOSBUSINESSAND RESOURCES DIRECTORYis OPEN FOR BUSINESSFind directory atwww.oldottawasouth.caParticipation is FREEWE WELCOME YOURCOMMENTS AND SUGGESTIONS.A voluntary project for thecommunity, thanks to all who have helped.Contact > > > Gail Stewart and Isla Jordanat businesses@oldottawasouth
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