Investing in equities can be a wise strategy for many reasons, but it all depends on your financial goals, risk tolerance and investment horizon.
Growth potential: Equities have historically offered higher returns over the long term than fixed-income investments such as GICs (guaranteed investment certificates). However, they are more volatile in the short term. If you have a long investment horizon, this may enable you to ride out periods of market fluctuations.
Reduced long-term volatility: Although equities are riskier in the short term, their volatility tends to decrease over periods of 10 to 20 years, approaching that of bonds. So, by holding your investments over the long term, you can minimize the risks associated with volatility while benefiting from the potential for high returns.
Inflation protection: “Safe” investments like GICs offer stable but low returns. Given inflation, these returns may not be sufficient to maintain your purchasing power over the long term. Equities, with their higher return potential, can help offset the loss of purchasing power caused by inflation.
Diversification: Investing only in low-risk investments can limit the growth of your portfolio. Diversifying with equities, in combination with fixed-income securities, provides a better balance of risk and return. This helps you maximize your chances of achieving your savings goals.
How does inflation affect your long-term purchasing power? The table below shows the effects of inflation on a $10,000 investment. With inflation as low as 2%, inflation affects the purchasing power of $10,000 to $6,729 after 20 years!
Erosion of purchasing power
In short, if you can handle short-term volatility and have a long-term investment horizon, investing in equities may be a good idea. Diversifying your investments between equities and fixed-income securities could also offer you better protection while increasing your potential returns.
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