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Understanding your Real Risks Research Team | Posted On Wednesday, April 15,2009, 12:33 PM

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Understanding your Real Risks



Many investors believe doing nothing a less-risky strategy than making a decision. A safe investment portfolio of all cash will allow you to sleep at night, but can be well thought-out a risky strategy if it falls short of meeting your objective.

In the long run, safe investments like bonds and cash will never shield an investor against the risk of inflation. Only by purchasing riskier investments like equities, commodities or real estate can an investor provide the protection they require against losing the purchasing power of their assets. In the long run, a portfolio of all safe investments will turn out to be too risky for shield against inflation.

Think an American couple who lived in the U.S. all their lifetime, and then moved to Canada to retire. The entire the investments were left to be managed in a diversified portfolio of U.S. securities. At present, all their expenses are in Canadian dollars. They now have coverage to a weak U.S. dollar. By investing several of their assets in "riskier" Canadian securities, or by hedging the U.S. dollar with currency futures, they are providing protection against a weak dollar and making their portfolio safer.

Many investors glance only at the risk of their individual securities, not at the mutual effect on their portfolio. In reality, portfolios can be made safer by investment approaches that by themselves might be risky, but that in the circumstance of the portfolio make it safer. This is in particular true when confronted with the "real" risks that investors face long-term, such as inflation.

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