Investing in equity funds can be a wise strategy for several reasons, but it depends on your financial goals, risk tolerance, and investment horizon.
Growth Potential: Equity funds have historically offered higher returns over the long term compared to fixed-income investments like GICs (Guaranteed Investment Certificates). However, they are more volatile in the short term. If you have a long investment horizon, this can allow you to overcome periods of market fluctuations.
Reduction of Long-Term Volatility: While equity funds are riskier in the short term, their volatility tends to decrease over periods of 10 to 20 years, approaching that of bond funds. By holding your investments for a longer duration, you could minimize the risks associated with volatility while benefiting from the potential for higher returns.
Protection Against Inflation: "Safe" investments like GICs offer stable but low returns. Considering inflation, these returns may not be sufficient to maintain your purchasing power over the long term. Equity funds, with their higher return potential, can help offset the loss of purchasing power caused by inflation.
Diversification: Investing solely in low-risk assets can limit the growth of your portfolio. Diversifying with equity funds, in combination with fixed-income securities, allows you to better balance risk and return. This helps maximize your chances of reaching your savings goals.
What is the effect of inflation on your long-term purchasing power? The table below demonstrates the effects of inflation on an investment of $10,000. With inflation as low as 2%, inflation reduces 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 equity funds may be a good idea. Diversifying your investments between equity funds and fixed-income securities could also offer you better protection while increasing your potential returns.
