Page 20 - A Canuck's Guide to Financial Literacy 2020

20

Effects of Time on Investing

The longer the investment time horizon, the more risk can be incorporated into the financial
plan. Due to the volatile nature of stock prices, there is greater risk incurred in owning
stocks if one has a short time horizon compared to someone who has a long time horizon.

The opposite is true for investing in bonds. There is more risk associated with holding a
bond long term because of the uncertainty of future inflation and interest rate levels.

Importance of Diversification

One of the most important things an investor could do is embrace diversification.
Diversification can minimize risk without adversely affecting return.
Investors can reduce their risk in the portfolios by including securities that have low
correlation with one another. Doing so eliminates all unique business risks associated with
each individual security. Market risk cannot be eliminated.

There are various strategies that one can embrace in order to diversify their portfolios.
These strategies can be used in combination.

• Asset Class - having stocks and fixed income in your portfolio will diversify your
portfolio
• Company Size - large cap companies are more stable than small cap companies.