Risk is not always a bad word when it comes to your finances

(NC) A lot of us think of risk in purely negative terms. We avoid it as much as we can, and we believe we’re right to do so.
When it comes to managing your money, there is an element of risk in all financial decisions. Rather than seeing it as a good or bad thing, it’s useful to think about risk as a tool you can put to good use.

Take a simple mutual fund investment for example. Invest $100 in the fund, and there is a risk that you will suffer a loss. However, stock and bond markets have shown a strong tendency to rise over long periods of time. So, you may decide to accept that risk of loss because simply leaving that $100 in a bank account will not earn you the kind of return on investment you need for retirement.

Effectively, you’re accepting risk to earn a return. And as we’ve seen from centuries of investment market performance, the more risk you’re prepared to accept, the greater your potential return can be.

These risk-for-reward assessments play out across financial markets. A major investment manager like CPP Investments, which manages the Canada Pension Plan (CPP) Fund, also makes decisions based on how each investment fits into its overall risk profile.

For example, their portfolio includes low-risk government-issued bonds as well as higher-risk private equity assets, which are direct investments into a company not listed on a public stock market. The bonds are likely to deliver a relatively modest return. Private equity investments offer the potential for higher returns.

An active management strategy – diversifying across different types of assets and geographies – combined with a long-term view is a popular strategy for individuals and larger funds alike. It enables CPP Investments to manage and mitigate significant risk and achieve an effective balance of risks and returns, resulting in a 10.3 per cent annual rate of return on investment during the 10-years ending June 30, 2022. This represents earnings after all expenses are subtracted, and means that as the portfolio is set up now, the CPP will remain sustainable for its beneficiaries for generations to come.

Professional investment managers understand that taking on risk may result in losses but finding the right risk-reward balance can help you achieve your financial goals over the long term.

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