Why avoiding risk is a risk to your wealth

FRIDAY, NOV. 09: The chance of loss keeps many potential investors on the sidelines — but staying on the sidelines could be the riskiest decision of all.

For the shy investor, the common quote “investing is too risky” causes these potential investors to continue keeping their cash under the mattress or sitting in savings accounts at the bank or even tucked away in their safety deposit box.

The reality is anything we do in life can be risky if we do it “blindly”.

However, being well informed and learning how to make good judgement calls can certainly eliminate a fair amount of risk.

Think about crossing Front Street — it can be a dangerous venture if you’re looking at your BlackBerry and you don’t check for traffic. The answer to crossing safely isn’t to stay inside; it is to take the appropriate precautions when you cross.

Since there are risks to everything we do in life, how then can we move from being “gun shy” to being comfortable in making decisions? Well, the answer is research!

Understanding the downside to doing nothing and the potential upside to doing something can be an educational task.

Sitting on the sidelines and remaining in cash can erode your purchasing power over time.

Prices have a way of increasing year after year, so most of the goods and services we buy today will cost more next year.

Over enough years, even small annual price increases add up. This is called inflation.

If you have $10,000 today and there is three per cent inflation over the next year, your money will buy three per cent less than it could have at the beginning of the year or in other words, at the end of the year the purchasing power of your $10,000 will have fallen to $9,700.

Inflation can be one of the most significant risks that a “risk adverse” investor will face. Your money must return more than inflation and currently that isn’t going to happen if you stay in cash.

Since inflation erodes the purchasing power of money, it is important to save money and invest those funds so you can preserve and grow your wealth.

There are low-risk ways to earn sound returns on your money and fight the effects of inflation.

You have worked hard for your money and you need to have your money work harder for you. Think about the goals you are trying to achieve financially, perhaps savings for your child’s education or saving for retirement.

Making sure that money you are setting aside each month has the ability to grow should ensure the success of that goal.

Risk profile

It’s all about being diversified and managing those risks through diversification is important.  Every investor has a slightly different risk profile or attitude towards risk.

A great description of risk and diversification is one I recently read at www.money-zine.com: “Balancing a portfolio of investments is all about understanding, accepting and controlling that risk.

“Understanding the risk is gained by asking questions about the investment itself.

“Accepting risk is a fact all investors need to appreciate: greater risks are normally accompanied by greater rewards.  Controlling risk is achieved by balancing a portfolio and monitoring that balance.”

Taking the first step and discussing your aspirations is essential. A professional who understands your goals, your time horizon for achievement and how much risk you are willing to bear will help you to achieve those goals.

Once you have met with a wealth manager they can provide you with an investment proposal to complement your ideas.

It’s all about balance and the risk versus reward trade-off, and most times long-term reward will outweigh risk.

Carla Seely is a Senior Wealth Manager at AFL Investments. She may be reached at 294-5712 or by emailing [email protected].