As investors, we all seek the highest returns with the least amount of risk. In finance, risk is the probability of losing money, and it’s important to note that there is no such thing as zero risk. Even if you stash your money under your mattress or in the safest bank, inflation will erode its value over time. In fact, the likelihood of losing value due to inflation when keeping money in a bank account is 100%. Simply put, holding onto cash guarantees a loss of purchasing power over time.

With this in mind, you need to make your money work for you. However, it’s essential to reduce the risks that are within your control. Here’s how:

1. Only Consider No-Load Mutual Funds

If you invest in mutual funds, choose no-load mutual funds. Although mutual funds with loads (sales charges) are becoming less common, they still exist, and some commission-based advisors will try to sell them to you. These funds increase your cost of investing without any added benefit.

2. Avoid Paying High Fees

Canada has some of the highest mutual fund fees globally, which can eat away at your investment returns. While actively managed funds in Canada may have expense ratios as high as 2.75%, many low-cost options like Vanguard ETFs have expense ratios below 0.25%. By avoiding high fees, you can keep more of your returns.

3. Don’t Buy Individual Stocks

Individual stocks, no matter how reputable, carry significant risk. For example, the original companies in the Dow Jones Industrial Average from 1896, like American Cotton Oil and U.S. Rubber, are all gone today except for one. Even today’s giants like Google and Amazon might not last forever. In contrast, index funds continually evolve, replacing outdated companies with newer ones, making them far less risky.

4. Diversify Your Investments

Don’t put all your money in one sector or asset class. A friend of mine was heavily invested in tech stocks like Facebook and Apple. While I convinced her to diversify within technology, her investments remained concentrated in one sector. For greater safety, it’s better to spread investments across different sectors and asset classes, reducing overall risk.

5. Minimize Taxes

In Canada, tools like the TFSA (Tax-Free Savings Account) and RRSP (Registered Retirement Savings Plan) can significantly reduce your tax burden. Taxable accounts invested in actively managed funds may incur capital gains taxes annually, whereas index funds with less turnover result in fewer taxable events and, consequently, lower taxes.

6. Avoid Paying Excessive Financial Advice Fees

Many investors overpay for financial advice. One friend of mine has an advisor who invests his money in high-fee mutual funds and then charges an additional management fee. These extra costs are avoidable. Instead, consider working with a fee-only financial advisor who charges for advice rather than receiving commissions from the products they sell.

Conclusion

Investing involves risk, but some risks can be minimized or eliminated. By reducing fees, diversifying investments, and taking advantage of tax-efficient accounts, you can ensure that your money works safely and effectively for you.

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