The most important characteristic of an investment product is its volatility factor. Yet most Canadians do not know how much their investment can go up or down in any given year or period. This can lead to very nasty surprises when investors get their statements in the mail. What I enjoy doing is showing my clients the best case and worst case scenario when purchasing investments.
Below are 4 critical facts about the volatility of your investments that you need to know to make sure that you are not getting yourself into an investment that you are not comfortable with:
- Fact 1 : Best & worst case scenario of Canadian stocks over a 1 year period
Best case scenario 1 year period: 86.9%
Worst case scenario 1year period : -39.2%
If we look at the Toronto Stock Exchange Index which is a basket of top Canadian stocks from all of our industries, the best 1 year performance this index has had was a mind boggling 86.9% between June of 1982 until June of 1983. The worst 1 year return was -39.2% Between June 1981 until June 1982. You have to realize that stocks can be this volatile. This tells us that if you invest your money but will need it in one year, you’re taking a serious gamble. This type of investment is suited for investors that will not need their money for many years AND can sleep at night knowing that their investment can fall significantly over a one year period.
- Fact 2 : Best & worst case scenario of Canadian stocks over a 3 year period
Best case scenario 3 year period: 39.3% on average per year
Worst case scenario 3 year period: -11.1% on average per year
If we examine the same index over a 3 year period you’ll notice that the volatility is reduced. But the range is still quite large at -11.2% from August 2000 to August 2003 to 39.3% from November 1977 to November 1980. This means that your portfolio had gone down every year for 3 years at an average of 11%. Your $100,000 is worth about $65,000 after 3 years. OUCH! So if you invest your money and need it in 3 years, stocks are still a relatively big gamble.
- Fact 3 : Best & worst case scenario of Canadian stocks over a 5 year period
Best case scenario 5 year period: 27.8% on average per year
Worst case scenario 5 year period: -1.9% on average per year
Now the numbers are a much better. The worst 5 year period occurred from March 1998 to March 2003 where the return was -1.9% per year on average. The best 5 year performance was achieved between July 1982 to July 1987 at a whopping 27.8% per year on average.
- Fact 4 : Best & worst case scenario of Canadian stocks over a 10 year period
Best case scenario 10 year period: 14.1% on average per year
Worst case scenario 10 year period: +2.8% on average per year
The worst the index has ever done over a ten year period is a plus 2.8% on average per year from August 2000 to August 2010. Not bad at all for a worst case scenario. The best 10 year period returned 19.5% per year on average from August 1977 to August 1987.
As a final and very important note a balanced portfolio has NEVER had a negative return over a 5 year period or longer.
If you would like to discuss the volatility in your portfolio let me know by sending me an email at john.kalos@meritfinancialplanning.ca
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2015 Advisor Websites.
