Volatility and risk are not one and the same thing!
- by Monica J. Weissmann, CFP, CIM, MEE
Volatility vs. Risk
With the increase in volatility that we have experienced since the beginning of 2018, there is a feeling of uncertainty hovering over the market. Even so, all the indications are, that there is no recession looming around the corner and mthe IMF has expressed their view about continuous global growth, in 2018 and over. Certainly there is a sense of increased risk because of the greater volatility of the market, which may make some of you feeling uncomfortable. But we should keep in mind that volatility and risk are not one and the same thing!
While “volatility” describes the fluctuations of the market values of the portfolios of investments, the “risk” is attached to the possibility of permanent loss of the money invested.
"Risk-Free" investments
In the past the “risk-free” investments were used to reduce the volatility of portfolios. These investments were less volatile and able to generate some returns in the same time. However, today the situation is quite different, as I will explain below.
Risk-free rate is the rate of return of an investment with no risk of loss.
To calculate the real risk-free rate, subtract the current inflation rate from the yield of the Treasury bond that matches your investment duration.
If, for example, the 10-year Treasury bond yields 2%, and the inflation was ZERO investors would consider 2% to be the risk-free rate of return.
But as the inflation is currently around 2% the risk-free rate is 2% - 2% = 0% …the risk-free rate of today is ZERO !
What does that mean for the individual investor (and also for the institutional investors) ?
It means that unlike the past, the risk-free investments cannot provide both “safety” and “income” in the same time.
It can provide either one or the other.
Get comfortable
As always our main concern is for you and our major desire is that you will be comfortable with the investments that you are holding.
In order to match the performance of the portfolios to the personal circumstances and risk tolerance of each and every one of our clients, we invite you to book a telephone or face to face appointment, with the purpose of reviewing the asset allocations and investment strategies to better control the volatility in your portfolios.
Ideas for peace of mind
I am attaching some ideas about investments that could be used for this purposes.
Manulife Investments is offering a broad variety of mutual funds. The following are possible choices:
Manulife Global Unconstrained Bond Fund
Manulife Strategic Income Fund
Manulife Strategic Balanced Yield Fund
PIMCO is one of the most reputable mutual fund companies specialized in fixed income (bonds).
PIMCO Canada is offering the following investments:
PIMCO – Monthly Income Fund
PIMCO – Monthly Income ETF
PIMCO – Growth and Income (CEF-Closed End Fund)
For more info about the PIMCO approach to generate investments , click on the link below:
www.pimco.ca
There are more opportunities than the ones presented above.
Some opportunities are using the IA Clarington EM bond funds. Other are related to the newly launched Fidelity Founders fund.
Other related to the Ninepoint International Small Cap fund – newly launched.
