How to think about risk and investment timelines
Finding a portfolio that best suits your needs
May 17, 2024
When you sign up for a Wealthsimple account, we’ll ask you a series of questions about your savings goals, your investing time horizon, and your personal tolerance for risk. We use this information to recommend a portfolio that best suits your needs.
Our goal is to invest your funds in a way that maximizes your chances of making a positive return, while minimizing the chances that you’ll lose money by the time you need to access your funds.
There are two main things to consider when evaluating your recommended portfolio:
- Your comfort with risk
- Your timeline for accessing the funds
Understanding your comfort with risk
Risk is all about your willingness to accept larger short-term losses to maximize long-term growth.
If you take on more risk and markets rise, you'll likely have higher gains. If you take on more risk and markets fall, you'll likely have larger losses. More risk can cause bigger fluctuations in your account balance.
You can control risk through asset allocation, or how much of your money is in equities (like stocks) versus how much is in fixed income securities (like bonds).
Stocks have historically generated greater returns over the long term than bonds, but they have also experienced higher fluctuations.
On the other hand, bonds provide a steady (although lower) source of interest income. Bonds typically experience much smaller fluctuations than stocks.
Wealthsimple offers a selection of portfolios with different asset allocations to help you manage your risk. There are three main categories for asset allocation: Conservative, Balanced, Growth.
Portfolio | Percentage held in equities | Percentage held in fixed income | Risk level |
|---|---|---|---|
Conservative | 30 - 40% | 60 - 70% | Low |
Balanced | 50% | 50% | Medium |
Growth | 75 - 90% | 10 - 25% | High |
Tip: Wealthsimple also offers Conservative, Balanced, and Growth asset allocations for our socially responsible and Halal portfolios.
How to think about investment timelines
Returns are most volatile in the short term and tend to become less dramatic over time.
If you only invest for a very short term (e.g. 12 months), you can expect a wide range of potential outcomes by the time you want to withdraw your funds. This is true no matter which portfolio you are in.
However, if you invest for a long term (e.g. 10 years), there’s a much smaller chance you’ll end up with a meaningful loss – even with risky portfolios. If you have a riskier portfolio, you can expect higher returns in the long run. However, you’ll also see bigger short-term swings.
Even at the 10-year mark and beyond, a range of outcomes is still possible. This unpredictability is an inherent part of taking risk to earn positive returns over time. To get a sense of the range of outcomes to expect, look at how markets have performed in the past.
Here are some guidelines for thinking about timelines and risk:
When do you need the funds? | Advice |
|---|---|
Less than 5 years | Choose a less risky approach. You might not have time to recover from a significant short-term loss. |
5 - 10 years | Consider taking on some risk. You have a bit more time to recover from any short-term losses. |
More than 10 years | To maximize your returns, consider a higher risk approach. You have lots of time to recover from short-term losses. |
Note: For inexperienced investors with a short investment timeline, it can be tempting to opt for a risker portfolio with higher potential returns – and hope that you get lucky. However, you should ask yourself: how would I feel if I suddenly lost 40% of the funds I’ve invested? Have I given myself enough time to recover from any big swings?