Risk Matters

Aug 14, 2018 | Joshua Opheim


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Less Risk, More Money

If you get the same returns as the benchmark but do it with less volatility, you will have more money.


How much can risk add up to?

Both scenarios start with $500K and have an average return of 8%, but by taking 50% less risk, it equates to more money in your investment account.

Risk matters because the less volatility you have in your portfolio, the more money you will have. 

Unfortunately most advisors cannot or do not notify their clients of the numerical value of risk in their portfolios. They will tell them that they've averaged 8% over the last 10 years, but you can not appropriately assess if this is good or not without putting it in relation to the risk that was assumed to achieve the return. Just like you can not assess if a five minute mile (rate of return) I performed last weekend was fast or not without knowing how I did it (risk).  Your opinion would change if I told you I ran it versus driving it in my car.  Your portfolio risk is just as important as your rate of return, your advisor should report both numbers to you.
For example, client (less risk) and client (more risk) who have both averaged 8% over the last 30 years on their initial $500K invested. However, client (low risk) has achieved that 8% with 50% less risk than client (high risk). See the results to the left.

 

This commentary is based on information that is believed to be accurate at the time of writing, and is subject to change. All opinions and estimates contained in this report constitute RBC Dominion Securities Inc.'s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates, market conditions and other investment factors are subject to change. Past performance may not be repeated. The information provided is intended only to illustrate certain historical returns and is not intended to reflect future values or returns.