Whatever you do with money you face risk
Many people don’t really think about it, but whatever you
do with your money – even if you do nothing –
you face risk. Risk is part of every financial decision you
make. That’s why it’s important for you to think
carefully about the various kinds of financial risk you face.
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"To be in the game, you have
to endure the pain"
George Soros |
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The one kind of risk everyone knows is the risk of losing
your money in the market. But market volatility is just one
kind of risk.
When you just leave your money in a savings account, you
expose yourself to another kind of risk. Although your money
is safe, you risk losing to inflation. If you’re getting
2% interest on your money, and inflation is 4%, the value
of your savings is declining 2% every year. That’s a
serious risk over the long run.
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"Inflation is not all bad. After
all, it has allowed every American to live in a more
expensive neighborhood without moving."
Alan Cranston, American senator |
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Another risk is caused by fluctuations in interest rates.
Let’s say you put your money in high quality bonds.
If interest rates go up, the price of those bonds will fall,
even though they are the highest quality. If you want to sell
them before they mature, you risk losing some of your capital.
And if you invest in long-term GICs, and interest rates go
up, you also lose out. Although the value of your investment
is guaranteed, you suffer an opportunity cost. You lose because
you’re receiving a lower return on your money than what
is currently being paid.
So, if risk is an unavoidable fact of financial life, what
can you do? Simple. You learn to minimize it and that’s
the subject of much of this section.
There is one risk free investment that will pay you
a great return
You should know that there is one investment you can make
that has virtually no risk and that will provide you with
a guaranteed high return. Just pay off any expensive credit
card debt you might have.
Compare the interest rate your credit card is charging you
with the interest rate your bank will charge you for a loan.
The difference represents the return you’ll earn by
borrowing from your bank and paying off your credit card balance.
Important information about our financial planning services can be found at the bottom of our
homepage.
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