How Much Risk Can You Tolerate? Part 2 of 3

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Last month, we discussed how much risk you could tolerate depending on your life situation.  This month, we 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 equity markets in an attempt to avoid this volatility and the risk that comes with it.  Many of those who were in the process of retiring and still held equity funds 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.  It can be devastating to a retirement plan or personal financial security if the business encounters financial difficulties or, in the extreme, fails.

Leverage or Debt Risk:  Owing too much money, for whatever reason, can cause serious financial problems should conditions change, making the debt difficult to service.  So many factors can impact 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 holding the bulk of your wealth in your RRSP or your home, the inability to provide an income or to pay for for medical care and could be devastating to you and your family.  Withdrawals from RRSPs 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 your family with a debt that would have to be repaid.

Inflation Risk:  While this has not been a significant problem lately, pundits still talk about increasing interest rates and, once the economy significantly improves, it may become an issue in the future.  For those on fixed income, such as pensioners and other retirees, inflation remains a potential risk.

Next month, we will explore ways in which to reduce financial risk.