A10

David Konning

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When equity markets are volatile, investors sometimes shift their investments into "safer" options, with the hope that they will experience less market volatility. However, investors should know that often these "safer" investments provide lower rates of return.

Successful long-term investors know that focusing on the long term and investing in the right solutions should yield better results.

Short-term market events can influence your decisions and negatively affect your long-term success. When investors focus only on the short term, they sometimes react by investing their retirement (or other long-term) savings in a savings account, guaranteed investment certificate (GIC) or money market mutual fund.

Short-term holdings play an important role in a portfolio, providing security and access to cash on short notice. But when a short-term solution is used for a long-term investment goal there are risks that are not self-evident, such as opportunity and inflation risks.

Even if the move is meant to be only temporary, it may mean that the portfolio will not achieve the growth the investor requires. Tax implications are also a consideration since short term solutions are generally taxed at higher rates.

If short-term volatility concerns you, remember that there are effective ways for you to achieve the growth you need, at a risk level you are comfortable with. Here are a few options that balance the risk and the returns required to meet long-term investment goals.

Although a GIC is generally thought of as a short-term approach, there are specific types of GICs that provide a longer-term approach. Some can enable you to participate in the growth of financial markets without the risk of losing your principal.

Returns are linked to the performance of one or more stock market indices or mutual funds. If the underlying investment goes up, your return is based on the increase. If the return on the underlying investment is negative, 100% of your principal is guaranteed.

An excellent way to take advantage of stock market volatility is by investing regularly with a preauthorized contribution plan. With a preauthorized contribution plan, the amount you choose is automatically transferred from your bank account to a mutual fund or funds of your choice on a regular schedule.

If you invest $200 every month, at an average annual rate of return of 7%, after 30 years you'll have over $17,000 more than if you invested the same amount at the end of every year.

By investing regularly, you're benefiting from a strategy called dollar-cost averaging. You buy more when the cost is low, such as during times of uncertainty, and less when the price is high. This helps you take advantage of equity markets even when the markets aren't favorable.

Note: The material in this column is intended as a general source of information only, and should not be construed as offering specific tax, legal or investment advice. Individuals should consult with their personal tax advisor, accountant, or legal professional before taking any action based upon the information contained in this column.

* David Konning is an investment and retirement planner at Royal Bank. He can be reached at David.Konning@rbc.com or at 856-0406.