news&views Autumn 2018 | Page 17

advantage is the fl exibility of buying or selling mutual funds on any business day. With thousands of mutual funds available in Canada, investors have a signifi cant variety from which to choose. A risk rating is calculated by each mutual fund manager. It is based on how much a specifi c fund’s returns have changed (volatility) from year to year. These ratings change over time, and they do not indicate how volatile a fund will be in the future. Each mutual fund must now have a Fund Fact document, which includes this fi ve-point risk rating: low, low to medium, medium, medium to high, and high. Financial advisors must provide clients with the Fund Fact document for each mutual fund that the client purchases. Risk rating is important when selecting funds. We anticipate that the greater the risk, the higher our returns will be. If this is not the case, other funds should be investigated. An important responsibility of the fi nancial advisor or planner is to determine the client’s risk tolerance. Generally, clients have a higher risk tolerance when they have a history of investing, they understand business and market risk, they do not rely on an investment for daily living expenses, they have a number of years to invest, and they have signifi cant fi nancial resources. Investments may focus on a specifi c asset, sector, and geographic area. Such a focussed investment is not well diversifi ed; however, it may do very well for a specifi c period of time. There is less volatility risk when investments are diversifi ed by containing a mix of fi xed income and equity investments and a variety of asset, sector, and geographic allocations. It is common for investors to have a bias for businesses and locations with which they are most familiar. Canadians tend to invest in Canada (local bias) despite more attractive investments globally. A risk mitigation strategy is to invest in mutual funds that are also segregated funds with an insurance guarantee. The segregated fund may guarantee a specifi ed value (75% or 100% of initial investment) upon the death of the investor or upon reaching the term of the 10- or 15-year contract. As investors become more sophisticated, they explore other investment options. Exempt securities are exempt from prospectus requirements and hence require less disclosure than a mutual fund. Investors must qualify to purchase an exempt security by having a high income or savings level and by making a large purchase. Usually exempt market securities have a higher level of risk. They are generally illiquid (cannot be sold) for a specifi ed period of time. Real estate and rental property purchases are another type of long-term investment. Home owners often have signifi cant dollars invested in their principal residence. In Canada, we do not pay capital gains tax on the growth in value of our principal residence. The investment in our home grows tax-free. The most signifi cant drawback to this type of investment is that buyers are not always there to pay the asking price. Real estate is illiquid in the sense that we may wait months for a sale to occur, or we may need to drop the price if we need to sell more quickly. Market fl uctuations do occur, which puts real estate into a high-risk category. We risk losing value when a sale needs to happen due to family, employment, health, or business circumstances. The investment industry off ers a variety of opportunities for investors. Canadians are challenged to avoid ‘local bias’ as they look for the most suitable investments. Generally, better returns are achieved when investments are planned for a longer term. Diversifi cation helps to spread the risk so that when money is needed, it can be withdrawn from an appropriate investment with regard to tax implications and growth in value. An important feature of an investment is the fl exibility to withdraw funds as needed. Financial services personnel are an excellent resource who provide information and instill confi dence for investment decisions. Certifi ed Financial Professional ® (CFP ® ) accreditation is an important credential of qualifi ed fi nancial advisors. ● news&views AUTUMN 2018 | 17