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What are the different types of investment risk?

Recent statistics show that investors are shifting from cash and money market investments to longer-term equity investments.

Since 1926, Canadian equities have returned an average 9.5 per cent total return, while 10-year Canada bonds have returned an average of 6 per cent. While the long-term stamina of Canadian equities is compelling, the equity market is not without risk.

There are many factors that can affect an investment’s risk level. Here are a few key types of risk to consider:

  • Business or default risk: The risk of losing your investment capital if the company runs into financial woes. Just ask investors in Nortel about hot-stock investments going from triple-digit prices to single-digit share prices.
  • Liquidity risk: The risk of not being able to cash in your investment when you want, and at a reasonable price. Many investments must be sold on the open market and may not be highly liquid. If liquidity and market demand is low, you won’t get a good price for your investment.
  • Interest rate risk: The risk that changes in interest rates will affect the value of your investments. Bond prices are particularly sensitive to interest rates.
  • Inflation risk: The risk that the return on your investment will be less than inflation. Inflation is buying power risk. If the return on your investment is less than inflation, then you are poorer than when you started. Simply put, you have lost part of your buying power because inflation has pushed up prices for essential living expenses.
  • Market risk: The bottom line is that all investments are susceptible to market risk. No matter how high the quality of the issuer or meticulous the selection process, most security prices follow general market trends and economic cycles.

Risk repellent

Your best investment risk repellent is a portfolio mix of cash, equities and bonds. Add to that mix, careful research, and an experienced, trusted financial advisor.