Protecting Your Money
What makes an investment feel safe for me?
This depends, to a large extent, upon your level of risk tolerance but remember that some investments are safer than others. You need to personally determine what “safe” means to you.
What can go wrong?
There are three basic risk factors when you invest money. There is a risk of a bear market during which time stock prices drop. There is also the risk of a bad investment if you get caught up in trying to make your money grow too quickly. Finally, inflation rates could exceed the rate of return on your investment and you wind up being behind when the term of your investment ends even though your investment made money. Remember, there is no such thing as a completely risk free investment.
How do I protect myself against unsafe investments?
There are a number of things that you can do. Among the most important is to know the source of the investment opportunity and to choose an adviser carefully. Learn as much as you can about the performance of the investment and be sure that you understand the investment including the terms, conditions and costs.
Which investments can help me limit risk?
There are essentially four things that you can do. Fixed income investments such as bonds help to limit risk. They pay back your principal with a guaranteed return. High quality or preferred shares limit risk in that they ensure that you will receive dividends before they are paid on common shares. Preferred stockholders also are first to receive their money if the company goes out of business. You could invest in mutual funds, which are actively managed and which contain a mix of investments to help reduce overall risk. You could also invest in Exchange Traded Funds (ETFs) which are typically not actively managed, but are designed so that their performance tracks the performance of various indexes, such as the Toronto Stock Exchange. ETFs have lower fees and help improve your return. You can purchase investments which guarantee a minimum return.
What should I do if I think an investment is a scam?
Avoid it. Certainly do not give out your personal information. Research the investment with a credible, independent source by, for example, checking press releases on news services such as Canada Newswire (www.newswire.ca). In addition, you could check the company’s registration with your local securities commission.
How do I minimize risk while maximizing return?
There are proven strategies to minimize your risk while increasing the likelihood of a good return. The National Bank offers Investment Planning advice on its Wealth Management website.
Who should I trust with my money?
It is comparatively easy to become a licensed financial adviser so it is very important that you carefully research any adviser you might be considering. Good advisers generally have a record of superior service which focuses on your success and shows consistent returns with reasonable risk. Be certain to check not only their performance record but also their qualifications and their experience. A checklist can help ensure that you properly assess your adviser.