At RBC InvestEase, we think a lot about investment risk. Why? Because, by definition, investing involves taking on some level of risk to earn some level of financial reward. If you keep your savings in a bank account you most likely won’t lose money, but you’re also not likely to earn as much as if you had invested it. You could lock a $100 bill in a fireproof vault to keep it safe, but when you open the vault, you’re still only going to have $100.
When you invest, you buy assets (like stocks or bonds) that you expect will earn a financial return over time. And over the long-term, they generally will. The thing is, investment returns can be volatile: some years they go up (sometimes a lot), some years they go down (sometimes a lot), and some years they’re flat. Risk is a measure of how much the value of your investment is expected to fluctuate over time.
A riskier portfolio is associated with the potential for higher future returns, but also the potential for higher losses. A less risky portfolio won’t gain as much if markets rise, but also won’t lose as much if markets fall.
Nobody can predict how financial markets are going to perform, so we focus on managing the amount of risk you should take on. When you first go onto the RBC InvestEase website, we’ll ask you a few questions to determine how much risk is appropriate for you as an investor. Learn more about how robo-advisors like RBC InvestEase work.
Some questions will be about you and your financial goals. What are you saving for? When will you need your money? Other questions are designed to gauge how much risk is right for you. We want to assess both your capacity to take on risk and your tolerance for risk.
- Your risk capacity means your ability to absorb potential losses in your portfolio. If you’re investing a small portion of your savings and don’t need the money for a long time, you can probably afford to take on more risk. On the other hand, if you’re investing most of your savings for a relatively short time horizon, you probably have less capacity to ride out the ups and downs of a riskier portfolio.
- Your risk tolerance is your willingness to take on risk. Some people love the thrill of a roller-coaster, while others delight in the serenity of the swan boats. We want to gauge how you’re going to feel about potential losses in your portfolio: does the idea of losing 5% of your investments make your stomach clench, or would you shrug it off as a normal market fluctuation?
After we determine how much risk is right for you, we’ll build you an investment portfolio that has the right mix of equities, fixed income and cash to match your risk profile.
We think about investment risk so you don’t have to, but remember, investing is not like gambling! RBC InvestEase will help you achieve your investment goals in a way that’s easy and convenient for you.