Financial Planning -> Stocks, Bonds etc.
Risk as it Relates to Investing
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 17 years later in 1982. |
| In this same 17 year period, the S&P 500 (500 large US stocks) increased from 40 to 142. |
| 1980 - In January, Gold hit high of $850 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. |
| 1994 - Mexico had a major economic crisis. |
| 1998 - Russia went bankrupt (defaulted on its bonds). |
| 1998 - Emerging Markets fell 22%. |
| 1998 - Hedge fund Long Term Capital Management went bankrupt. The Board of Directors included 2 Nobel Prize winners for economics. |
| 1999 - Brazil economic crisis |
| 2000 - Emerging Markets fell 32% | ||||||||
| 2000 - The tech bubble burst. | ||||||||
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From 2000 to 2002:
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| 2001 - 9/11. | ||||||||
| 2002 - Argentina went bankrupt (defaulted on its bonds). | ||||||||
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2008/09 US financial crisis - Dow/TSX down approximately 42%:
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| 2011 - In August, Gold hit a high of $1,916 US per ounce. This is an average return of 2.6% per year from the January 1980 high of $850. | ||||||||
| 2011 Portugal, Iceland, Ireland, Italy, Greece, Spain (PIGS) financial crisis. | ||||||||
| 2020 COVID-19 pandemic caused a dip of approximately 30% in March, but as of October 13, 2020 the US markets have recovered (from Jan 1 values), and the Canadian market had almost recovered, but both are still relatively volatile. |
The following list shows how countries and economic sectors are usually rated, from low risk to high risk. The positions in the list will usually change as countries either falter or prosper, and as economic sectors are re-evaluated by analysts.
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Zimbabwe Undeveloped markets China Russia Indonesia India Ukraine Poland South Africa Brazil Mexico Singapore Emerging markets ( VWO) Sweden Italy Canada Japan Germany United Kingdom Pacific Region (VPL) United States (SPY) Europe (VGK) |
High Risk |
Sectors
Energy Materials (Resources) Technology Industrials Health care Consumer discretionary Financials Telecommunications Consumer staples Utilities Long bonds Medium bonds Short bonds Cash
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Low Risk |
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The risk of an ETF (VGK, VPL, VWO, VEU, etc) is less than the risk of the individual countries it represents. See our article on recommended stocks (ETFs) for inside or outside of your RRSPs.
How to lessen risk:
| do your own research, or get professional advice to help pick stocks. There are hundreds of different organizations that rate and make recommendations about stocks. |
| have your investments diversified across many countries and industries |
| buy good quality stocks or exchange traded funds (ETFs) |
| hold your investments for long periods of time |
| when buying bonds, buy investment grade (BBB or higher) bonds |
Despite all the financial crises that occur, you can see by our article on historic returns on stock markets and other investments that by buying quality investments and holding them for a long time, you can make a good return on your investments.
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Buy Investments and Hold Them Forever
Tip: Buy quality investments and plan to hold them for a long time.
Revised: October 26, 2023