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