We aren't experts at risk, but this is how we see
things. The main types of risk are political risk, the risk of volatility,
and risk related to the quality of investments.
There is political risk in all countries, because as governments
change, their policies change. This can affect the price of
investments quite dramatically, especially if the government is a
socialist government, or a non-democratic government.
Stock markets are
often volatile due to greed and fear. Greed can drive stocks to
unrealistic highs, and fear can drive them to unrealistic lows.
Interest
rates can also cause volatility in stocks and bonds.
Another risk is the quality of the company behind the stocks.
Developed countries have securities laws which require companies to
provide audited financial reports annually. These reports are
usually reliable. When investing in developing countries, the
reports may not always be reliable.
When you are buying bonds, their rate of return is related to their
risk. There are bond rating agencies that rate the bonds from AAA to
junk. As the quality of the bond decreases, the rate of return
increases. The main risk with bonds is that their returns are not as
good as stocks, and you may end up outliving your money. This is
much less likely with stocks or ETFs.
As stocks go up you don't
usually hear very much about it, but when they go down, it is often on the front page of the
newspaper. This is because stocks usually slowly rise,
but occasionally they go down very quickly. Every day there is a financial crisis happening somewhere
in the world. If you just pay attention to all the bad
news, you would never invest in stocks. Some of
the financial crises include:
 |
1965 - The Dow
Jones Industrial Average (30 large US stocks) closed at 969.3. It did not
again reach and stay over this price permanently until 1982.
For 17 years there was no return, but the Dow in March 2007
was over
12,000. |
|
In this same 17 year period, the S&P
500 (500 large US stocks) increased from 40 to 142, and in
March 2007 was over 1,300. |
|
1980 - Gold hit $850 US per ounce. In March 2007
the price was $640 US per ounce. |
|
1980s - Savings & loan crisis in the US.
Over 1,000 savings & loan institutions failed. |
|
1987 - North American stock markets crashed. |
|
1989 - Japan's Nikkei 225 index hit a
high of 38,915, and by 2002 it had fallen to
8,303. In March 2007 it was almost 17,000. |
|
1994 - Mexico had a major economic crisis. |
|
1998 - Russia went bankrupt (defaulted on its bonds). |
|
1998 - Emerging Markets fell 22% and in 2000 they fell 32%, yet the
average return for 1970 to 2006 was 16.2%. |
|
1999 - Brazil economic crisis |
|
2000 - The tech bubble burst. |
|
From 2000 to 2002:
 |
the Nikkei (in yen) was down 69% |
|
the S&P 500 (in US$) was down 43% |
|
the TSX (in Cdn$) was down 22% |
|
European markets (in US$) were down 51% |
|
|
2001 - 9/11. |
|
2002 - Argentina went bankrupt (defaulted on its
bonds). |
