When market is volatile, investor flock to the perceived security of shorter term investments. While short term investments have a role to play as part of a diversified portfolio, using them incorrectly can undermine your long term financial security.
People often "park" their capital in a safe, low-yielding investment until the market settle down, and then move it to a more appropriate long-term vehicle. Too often, however, they wait too long. The potential costs are high. Keeping your investments in low-risk/ low-return vehicles for too long can prevent you from achieving your long-term goals.
Conservative "no-risk" investments such as money market funds don't protect a portfolio from the erosion caused by inflation and income tax. Over the long term, inflation is a far more serious risk than market volatility. For example, $300,000 in savings now will be worth only about $200,000 in 10 years if inflation averages 3% annually.
Over 20 years, the same rate of inflation cuts the nest egg to $163,138. Although inflation has been low for the post few years, over the past quarter century the average annual rate of inflation has been more than 5%. Inflation takes a bite over the short term as well. Suppose that our conservative investments pay 5% a year. if inflation average 3%, your real return is just 2% per year. And if that income is subject to a marginal tax rate of 40%, your return drops to 0.
The most effective way to produce stronger returns and protect against inflation erosion is through equity investment such as growth mutual funds. while equities can be volatile over the short term, in the long term they have historically outperformed fixed income and money market investments and outstripped inflation. Outside a registered plan, equities bring beneficial tax treatment. while interest income is full taxed, capital gains are taxed on only 50% of their value and dividends from Canadian companies qualify of the federal dividend tax credit.
To protect your portfolio against short term market volatility, you need to diversity. For example, along with equity mutual funds your portfolio should include some bond and money market funds. Investment should be spread out across a number of geographical regions and encompass more than one investment style.
People often "park" their capital in a safe, low-yielding investment until the market settle down, and then move it to a more appropriate long-term vehicle. Too often, however, they wait too long. The potential costs are high. Keeping your investments in low-risk/ low-return vehicles for too long can prevent you from achieving your long-term goals.
Conservative "no-risk" investments such as money market funds don't protect a portfolio from the erosion caused by inflation and income tax. Over the long term, inflation is a far more serious risk than market volatility. For example, $300,000 in savings now will be worth only about $200,000 in 10 years if inflation averages 3% annually.
Over 20 years, the same rate of inflation cuts the nest egg to $163,138. Although inflation has been low for the post few years, over the past quarter century the average annual rate of inflation has been more than 5%. Inflation takes a bite over the short term as well. Suppose that our conservative investments pay 5% a year. if inflation average 3%, your real return is just 2% per year. And if that income is subject to a marginal tax rate of 40%, your return drops to 0.
The most effective way to produce stronger returns and protect against inflation erosion is through equity investment such as growth mutual funds. while equities can be volatile over the short term, in the long term they have historically outperformed fixed income and money market investments and outstripped inflation. Outside a registered plan, equities bring beneficial tax treatment. while interest income is full taxed, capital gains are taxed on only 50% of their value and dividends from Canadian companies qualify of the federal dividend tax credit.
To protect your portfolio against short term market volatility, you need to diversity. For example, along with equity mutual funds your portfolio should include some bond and money market funds. Investment should be spread out across a number of geographical regions and encompass more than one investment style.
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