There are two basic types of investments you can make - an equity investment or a debt investment.
Equity investments mean that you purchase stocks in a company. When you invest in company stocks you can earn dividends from their profits. Beyond those dividends, investing in company stocks may also earn you capital gains. Capital gains are earned when you sell a stock or share for a higher price than when you purchased it. The other type of investment is debt investments. Debt investments (bonds) involve investing in funds that provide loans to firms or individuals. Usually, debt investments would mean your investment is locked for a certain term with the possibility of penalties if you want to withdraw before the agreed-upon term ends. Earning in a debt investment comes from the interest that borrowers pay on their loans.
Of course, deciding what type of investments you should make depends on several factors. These include:
Why you are investing is an important factor to help you decide what types of investments you should make. Your investment goals can be tied to your financial goals, but not necessarily. Let’s look at a simple example to help you understand better. For example, you may have a financial goal of buying a car in two years. Of course, you could take a loan to buy the car you want, or you could start saving up to buy the car. However, for the purpose of the example, let’s say you want to buy a car by earning from investments. So, you would make investments that would earn you enough returns to comfortably buy the car that falls in a particular price bracket. Your financial goal of having ‘x’ amount to buy a car in two years is linked to your investment goal of earning ‘x’ amount in two years. Of course, it may simply be that you would like to earn an extra amount of money every year from investments. That is an investment goal. Or you may want to grow your wealth by a certain percentage. Growth is another investment goal where the earnings are redirected back into investments and not used for any other purpose. Every plan needs a goal to be successful. It is the same for your investments.
Investors are usually categorized by their appetite for risk. ‘Risk’ in investment terms means the chances of you losing your investment. High-risk investments mean that there is a greater chance of losing your money. A low-risk investment, in contrast, means that there is very little chance of losing your money. All investments are subject to risk however, the level of risk you are comfortable taking is called your risk appetite. You may be open to taking higher risks. Or you may be risk averse which means you want to take as low a risk as possible.
You may even fall somewhere in between. Typically, a high-risk investment allows you to earn a higher amount of interest. However, it is also a greater gamble that you will undertake since it could mean that you could even lose your money. On the other hand, a low-risk investment would have a lower interest rate and consequently lead to lesser returns, but at least you can be sure that your money is relatively safe, and you can expect to get some returns on your investment. It is important to determine your appetite for risk as it will help to choose the right investments for your specific financial situation and goals. For example, if you do not want to take big risks while investing, it would be counter-productive to examine or invest in high-risk investments. On the other hand, if you would like to take risks, investing in low-risk investments would not be the correct (and in fact, quite a frustrating) option for you.
Benefits of a low-volatility portfolio
It is less risky
A low-volatility portfolio allows you to grow your wealth without taking on too much risk. As the value of your investment does not fluctuate too much, the amount of risk that you are incurring is kept to a bare minimum. This is one of the biggest benefits of a low-volatility portfolio. When you have a low-volatility portfolio, you can ensure your investments are relatively stable and the chances of you losing your money is less.
It is more predictable
Investments that have low volatility are inherently more predictable than those that are highly volatile. You know that their value will not fluctuate greatly from one day to the next. This allows you to make predictions about their performance. If you see that the price of the stocks is slipping or rising, they will generally follow a trend, allowing you to make accurate guesses about how the price or value may rise or fall further in the near future. In the case of a highly volatile stock, it would be impossible to predict its value in the near future.
A better option for those who care about absolute risk
As we’ve already discussed above, you already know that there are different types of investors and risk appetites. But even the kind of risk that investors may be concerned about could differ from one to another. Those who care about ‘absolute risk’ are those whose main concern is losing the money they have invested, rather than the performance of their investments. Most investors who are looking to grow their personal wealth by investing a part of their savings or earnings care about ‘absolute risk’. For them, a low-volatility portfolio is always a better option as there are fewer chances of them losing their money.
Stock prices usually tend to increase
While there is no guarantee that a stock price will necessarily increase, it has been observed that when you have a low-volatility portfolio, the prices of stocks that you invest in usually tend to increase. This is because the stocks that have low volatility are more stable. This consistency and low risk are more attractive to investors. As a result, the value of these stocks increases over time.
Easier to take investment decisions
As an investor, every decision you make can have a positive or negative impact on your wealth. If you make the wrong call you may end up losing your hard-earned money. On the flip side, if you make the right decision, you can easily meet your investment and financial goals and grow your wealth successfully. A low volatility portfolio makes it much easier to make investment decisions. As you know that the price or value will not fluctuate too much but follows an upward or downward trend, you can buy or sell stocks without worrying that the stock price may suddenly change, leaving you with regret.
As you can see, there are many benefits to a low-volatility portfolio. If you would like to get an expert to help with determining your goals, risk appetite, and a sound investing strategy, (as well as recommendations for the ideal investments for your specific goals and situation), please reach out to our advisors. We would be happy to help you with your financial planning and establish the ideal investment portfolio for you.
Mutual funds and related financial planning services are offered through Credential Asset Management Inc. Mutual funds, other securities and securities related financial planning services are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. Financial planning services are available only from advisors who hold financial planning accreditation from applicable regulatory authorities. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters.