Page 17 - A Canuck's Guide to Financial Literacy 2020

17

Every mutual fund provides a document called Fund Facts for investors. This includes the
fund’s risk rating, based on the past volatility of the fund’s returns.

Types of Risks

Capital Risk

The most common type of risk is the danger that your investment will lose money. Markets
will be volatile but if you can stomach the ups and downs of the markets, then you will be a
successful investor long term. The lower you are on the risk and reward spectrum, the less
likely you will lose your investment.

Interest Rate Risk

When interest rates rise the price of bonds decline. Interest rates also affect economic
activity and borrowing costs.

Default Risk
Investing could expose you to default risk especially if the company is rated poorly by a
credit agency.

Inflation Risk

Higher prices lower the purchasing power of your investments. If your investment returns
don’t exceed inflation you are losing purchasing power.

Economic Risk

Economic recessions and depressions can have profound effects on asset valuations.

Liquidity Risk

If you need to sell an investment you may not be able to find a buyer in a timely manner.
Most publicly traded equity and bonds are fairly liquid. But many alternative investments
such as real estate, art work, coins, stamps, etc. may experience periods when they are
illiquid.

Reinvestment Risk

Let’s assume that many years ago you bought a Treasury Bond paying 8% that is maturing.
Now the interest rate is less than 3%. If you reinvest it will have to be at a much lower rate.