Risk Tolerance

Section 3.4 Page 56

The 4 Stages of Life with respect to investing:

• Investment patterns tend to follow the stages of life. As circumstances change, so should how they invest.

– Early Career– Established– Pre-retirement– Retirement

Risk Tolerance

• Is how much fluctuation in your financial resources you can withstand.

• Affected by two key factors:– The actual amount of money you have after

expenses– Your ability to recover if you do suffer losses

• For most people, the money they have after expenses increases as they move through their working years.

• As you near retirement your ability to recover from losses decreases.

Investment Objectives:

• Safety of principal (not ending up with less than you started with)

• Income (getting regular payments – interest or dividends)

• Growth (ending up with considerably more than you started with)

Investments can earn a return for you two ways:

• Income return– A regular dividend (from a stock) or interest

(from a bond)

• Capital Gain– Occurs when you sell an investment for more

than you paid for it.

• The total return on an investment is the sum of the two returns (Income return, capital gain)

• The riskier the investment, the greater the potential return (and therefore the greater possible loss)

Example #1

• Joel has just retired. He will receive his Canada Pension. He must decide what to do with RRSP investments to supplement his Canada Pension. He knows that a dollar will not likely buy as much in 10 years as it does today.– a) Rank Joel’s investment Objectives– b) How would you recommend Joel invest his

RRSP money and why?

Which is riskier? Explain

• Small Cap Stock or Blue Chip?

• Government or Corporate Bonds

Lets Think:

• When would a capital loss occur?

• DO – PAGE 58 # 3, 4, 5, 6