Risk Free Investments

Using the terms "risk-free" and "investments" in the same sentence often causes people to roll their eyes and move on to the next topic. There's no such thing as an investment with no risk, is there? Well, that depends on what your interpretation of risk actually is.

Over the past few years, we've certainly seen out share of investments that have proven to be money-losers: Eron Mortgage Corporation, Bre-X Resources, Enron, and Nortel, to name a very few. I am not trying to paint all these investments with the same brush. In some cases we saw a sagging economy causing demand for technology to disappear; in others, we saw out and out fraud and manipulation. But you could say there was a certain amount of investment or market risk implicit in these ventures.

With the softening of world equity markets, we have recently seen people shifting their hard-earned savings into fixed-income vehicles that are traditionally offered by financial institutions of one form or another. GICs or term deposits have attracted a significant amount of investment savings lately, partly because of their "guaranteed" nature, and partly because some return is perceived as ultimately being better than no return, or even a loss.

The rub, of course has been that coincidentally, interest rates have been very low over the past few years as well. Yes, but then they are risk-free, aren't they? It's a bit of a trick question, as you can imagine. There is certainly no investment or market risk, due to the guarantee. At the same time, however, there is a different risk and that is interest rate risk.

Depositing large sums of money into GICs may prevent investment risk and certainly fraud or manipulation. It does not insulate one against the fluctuation of interest rates. Locking in for five years or longer will limit the flexibility of being able to take advantage of rising rates, hence interest rate risk.

GICs can be an essential part of an overall balanced investment portfolio, including equities and cash. A well-known strategy would be to "stagger" or "ladder" maturity dates, to provide liquidity at opportunistic moments. The flip side would be protection from declining rates, offered by those terms with longer maturity dates.

Low-risk? Certainly...no risk? Not necessarily. There will always be a place for guarantees fixed-income investments. But don't throw your strategy out the window just because of market conditions. Risk can be a good thing...in moderation.

Gary Elliot, CFP, is with Partners in Planning in Chilliwack, BC, and can be contacted at 604 792 8111.