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The Great-West Life Assurance Company, London Life Insurance Company and The Canada Life Assurance Company have become one company – The Canada Life Assurance Company. Discover the new Canada Life

The Great-West Life Assurance Company, London Life Insurance Company and The Canada Life Assurance Company have become one company – The Canada Life Assurance Company. Discover the new Canada Life

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Risk tolerance: how to deal with market volatility

Key takeaways

  • All investing includes risk, but there are ways to manage that risk
  • Every person has a unique tolerance for investment risk
  • Creating an investment plan can help you manage investment risk
  • There are strategies for dealing with market volatility

What is investment risk management?

Investment risk management means identifying, evaluating, and limiting the risk of losses when you invest.

Investment risk management 101

Know your risk tolerance

The first step in managing investment risk is understanding your risk tolerance. Two factors work together to determine your risk tolerance – your willingness and ability to take risk. 

Risk tolerance comes down to your psychological makeup and preferences and your real-world financial situation. If you’re willing to take risk, but can’t recover from market drops, you could run into real challenges.

An advisor can help you determine your risk tolerance and investment personality.  

Create an investment plan and stick to it

Your advisor can help you build an investment plan based on your investing goals and your risk tolerance. Once you have a plan you can review it regularly and update it as your life and goals change. 

When you encounter market volatility, remembering your goals and your plan to achieve them will help you stick to your plan and avoid making emotional investing decisions.

Focus on the long run

Market volatility is part of normal and healthy market behaviour. Dramatic moves in the market can make you question your investment plan. However, when the market falls, history shows eventually it comes back even stronger.

Keeping a focus on your long-term investment goals can help quiet media noise and help prevent you from making choices that don’t follow your plans.

Asset allocation and diversification

Diversification is a core technique for reducing risk. It means holding a variety of investments to help lower your worry if 1 investment falls in value. It’s also important to choose an asset allocation that makes sense for your financial situation and goals.

Some factors include your age, what kind of returns you need (and when), and how much risk you can handle. Stocks are often seen as offering the most potential for increasing in value, however, they also have more risk. To create a portfolio with stable returns, you may also invest in bonds, which are typically less volatile but offer less potential for returns, or other assets which may offer lower volatility alongside less return.

Your advisor can help you diversify your investment and choose assets that reflect your risk tolerance and help you achieve your goals.

Strategies to help manage volatility and risk

There are several investment strategies you can use to help limit your investment risk.

Dollar-cost averaging

With dollar-cost averaging, you invest the same amount of money on a regular basis, regardless of the price of the investment.

Over time, investing this way can lower your average cost per unit — compared to what you’d have paid if you'd bought all your units at the same time when they were more expensive than the average. 

Avoid following the herd

An example of herd behaviour is when some investors decide to sell based on bad economic news, and others follow. Soon there’s a big market correction as many investors sell their shares. You’re often better off staying invested and waiting for prices to recover. Likewise, when stocks rise, following the herd can motivate investors to buy hyped and possibly overpriced investments.

Take advantage of market ups and downs

This is a strategy for experienced investors. If you understand a company, you can set a target share price. During a down market mood, you may be able to buy that stock while it’s effectively on sale. In a rising market, when the stock price is above your target, you can sell and take profit.

Remove emotion from your investment decisions

Investing can be an emotional experience. After all, you’re putting your hard-earned money into investments to meet your financial goals. Still, it’s important not to let emotions rule your investment strategy. 

Remember, even professionals don’t know for sure when prices will go up and down.  Although markets dip, they also recover – and you want to be there when they do. That’s why it’s important to develop a solid investment plan and stick to it over the long-term.

What's next?

Now that you know more about dealing with market volatility why not meet with your advisor to: 

  • Discover your risk tolerance
  • Determine your investment goals
  • Create an investment plan

The information provided is based on current laws, regulations, and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax, or other professional advisors.