How Much Risk Can You Tolerate? Part 2 of 3
Last month we discussed how much risk you could tolerate depending on your life situation. This month we will consider other risks to which each of us are exposed:
Market Risk: We all have experienced the effects of a volatile market and the havoc it can cause both financially and emotionally. Since mid 2008 the market has experienced “saw tooth” rates of return and many have fled the equity markets in an attempt to avoid this volatility and the risk that comes with it. For those that were in the process of retiring and were still in equity funds, many had to put retirement on hold.
Business Risk: It has been estimated that those who own and operate businesses have 50% or more of their wealth tied up in the venture. This can be devastating to a retirement plan or financial security if the business should encounter financial difficulties or, in the extreme, fail.
Leverage or Debt Risk: Owing too much money, for whatever reason, can cause a serious problem with one’s finances, should conditions change so that the debt becomes difficult to service. So many factors impact on this type of risk that, suffice it to say, serious debt should be avoided.
Health Risk: What effect would a serious illness or disability have on your retirement or financial plans? If you are like many Canadians with the bulk of your wealth in your RRSP or your home, the necessity of raising money to provide for medical care and expenses, not to mention the continuation of income for our families, could be devastating. Withdrawals from RRSP’s are subject to income tax so doing so could greatly impair or even destroy plans for retirement. Borrowing against the home would incur interest, decrease cash flow and saddle the family with a debt that would have to be repaid.
Inflation Risk: While this has not been too significant of a problem lately, pundits still talk about increasing interest rates and, once the economy significantly improves, it may become a problem in the future. For those on fixed income, such as pensioners and other retirees, inflation still remains a potential risk.
Next month we will explore ways in which to reduce or eliminate financial risk.