So you've created an account with Wealthsimple and now you're wondering if we've put you in the right portfolio. In fact, how does a risk assessment questionnaire or a financial professional decide what risk profile is best suited for you? Read on to understand Wealthsimple's investment strategy, how stock markets generally move, what risk really means, and how we assess your risk profile.

Understanding Passive Investing

Wealthsimple uses a passive investment strategy - you can read more about it here - which basically means that your portfolio will track the performance of the global market. It's also important to understand that, historically, stock markets have almost always trended upwards given a long enough period of time. However, they don't go up in a straight line - sometimes they go up, sometimes they go down. Some years they go up a lot, some years they go down a lot, and some years are fairly flat. In other words, stock markets fluctuate constantly but trend upwards.

Wealthsimple will ensure that your portfolio is tracking the global market movements and our goal is to capture the long term growth trend. 

So what does risk really mean?

Now that you understand the basics of how markets generally move, let's dig into what risk actually means. Since nobody can control market movements (or returns for that matter), Wealthsimple focuses on controlling the level of risk you should expose yourself to. Risk (or Volatility as we call it in the financial industry) is simply a measure of how much your investments will fluctuate depending on how markets move. If you take on more risk and markets rise, you're likely to have higher gains. But if you take on more risk and markets fall, you're likely to have larger losses. In other words, taking more risk will make your account more volatile. If you take on lower levels of risk, your investments will gain less or lose less if markets rise or fall, respectively. So taking lower risks leads to less volatility, or more stability.

In general, controlling risk is done through asset allocation, which is a fancy term that simply refers to how much of your money is in stocks (i.e. equities) versus how much is in bonds (i.e. fixed income). Stocks (or shares in companies) have historically generated greater returns over the long term than bonds but have also been the main contributor of higher fluctuations. On the other hand, fixed income securities or bonds provide a steady (although lower) source of interest income.  They experience much smaller fluctuations than equities. 

To put it simply, having more equities in your portfolio leads to higher risk (or fluctuations) but better long-term growth potential. Having more bonds or fixed income in your portfolio provides better short-term stability but reduces the long-term growth potential of your portfolio. 

How does Wealthsimple assess my risk?

Using a combination of your objectives, your investment time horizon, your level of income, your net worth, your investment knowledge, your past investment experience, and your personal tolerance to risk, Wealthsimple is able to assess how much risk (or potential fluctuations) your investments should be subject to.

Stocks are risky and bonds are safe, right? This is the conventional wisdom we’ve all heard time and time again. But history shows that a lot depends on your investment horizon.

When academics, journalists and market commentators refer to risk, they're often talking about how much the value of an investment fluctuates. But for most of us, our primary financial risk is not having enough money to achieve our goals in the long-term. And with that understanding of risk in mind, the so-called “risky” assets may actually be less risky over the long-term.

This chart shows how often someone invested in the U.S. stock market and in U.S. 10-year government bonds would have lost money over various holding periods during the past 145 years. The chart shows the probability of loss before and after inflation (i.e. in nominal and real terms). An investment bought for $10 and sold for $10 several years later has broken even in nominal terms, but it's lost money in real terms - because of inflation, that $10 buys less at the end of the period than it did at the start.

Probability of loss by time horizon

The data show that if you need your money within a year or two, the stock market is indeed a risky place to invest it. Stocks have delivered losses in about a third of all one-year periods. Sometimes the magnitude of those losses can be substantial - for example, stocks dropped more than 50% during the fall of 2008 and early 2009. Bonds, on the other hand, have only lost money in approximately 10% of one-year periods and the severity of those losses is typically mild.

If you're investing for longer-term goals, however, you might view the risks differently. The stock market has only lost money in 3% of all 10-year periods and has only failed to keep pace with inflation 12% of the time. Over 20-year holding periods, stocks have never returned less than inflation. And usually they deliver much more: the average inflation-adjusted return from stocks has been north of 6% per year.

What about bonds? While they have never lost money over a 10-year period in nominal terms, they have failed to keep pace with inflation 28% of the time. In other words, in more than one-quarter of all historical 10-year periods, bonds would have left you with less purchasing power at the end of the period than you had at the beginning. Even over 20-year periods, bonds have delivered a loss after inflation about a quarter of the time.

Why This Matters

Many people are afraid to invest in stocks because they believe them to be too risky. So instead they invest for long-term goals in bank accounts, GICs, and government bonds. But the data show that over long periods of time the risk of investing in stocks is much lower than commonly thought, and may even be less than the risk of bonds, once you factor in inflation. Investors who shun stocks to avoid volatility pay a steep price in the long-run.

Of course, this only holds true for a broadly diversified basket of stocks. An under-diversified portfolio of stocks would deliver losses more frequently - even over long time horizons. This is one reason why Wealthsimple invests in ETFs that give its clients exposure to thousands of stocks from around the world.

None of this means that there is no place for bonds in your portfolio. Their important role is to reduce volatility. If you are in or approaching retirement this is crucial. But even if you're not in that phase of life, you might find the that the ups and downs associated with an all stock portfolio are difficult to stomach. Holding bonds may somewhat reduce your return over time, but if it helps you stick to your plan, it’s well worth it.

For clients who wish to avoid losses, a high interest savings ETF might be a good option.

What is it?

Think of it as fund that purchases savings accounts across Canada. Unlike GICs, there is no minimum holding period and it is liquid, meaning that it can be sold anytime. More importantly, it can also be held within an RRSP, TFSA, or any registered account. You can find the yield (or the interest it pays) and more information about the fund here.

When should I invest a high interest savings ETF?

It is ideal for clients who plan to withdraw the majority of their funds from a particular account in the near term - generally within the next 3 years. For example, a high interest savings ETF is a good choice if you're planning to use your RRSP for a homebuyer's plan or need the funds in your RESP to fund your children's education. 

Can I also invest in this ETF in a non-registered (personal) account?

Yes. 

What are the fees on this ETF?

We charge the same management fee regardless of what you're invested in. This is to ensure that we're not incentivized to recommend one portfolio over another. In other words, we'll always recommend the best portfolio for your situation. You can learn more about our management fees here.

So you've got some money set aside for short-term goals (P.S: in the financial world, short-term is categorized as less than 3 years). This can be money going towards a downpayment, a car, a vacation, or a myriad of other objectives.

How should you invest this money? We all want our money to work hard for us, so it can be tempting to put it in the stock market. After-all, stocks have historically been the highest returning asset class.  But that's a dangerous approach. Although investing in a diversified basket of stocks has made for a wonderful long-term strategy, values of these stocks can fluctuate unpredictably and sometimes dramatically over short periods of time.

If you invest your short term funds in the market, you could end up having to pull the money out at a loss, or equally unappealing - pushing back that important goal you've worked so hard to save for!

Here's the chance of historical probability of that happening:

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Over a 1 year period, there is a 35% chance of losing money on the stock market. 

Over a 2 year period, there is a 25% chance of losing money on the stock market. 

Over a 3 year period, there is a 15% chance of losing money on the stock market. 

Not only could you lose, but in some downturns, such as 2008's market crash, you can lose big. In that instance, stocks dropped by nearly 60%. Based on this, we believe that the potential reward from investing over a short period of time is not worth the risk. Taking risks makes sense when you've got the time horizon and the discipline to ride out short-term negative fluctuations - but many investors underestimate what "short-term" can be. On rare occasion, markets can be down over periods of 5 or even 10 years. For short-term goals, protecting the money becomes a priority to ensure you don't have losses by the time you need the funds. 

For this reason, Wealthsimple created the Save account. Instead of keeping cash in your chequing account generating virtually nothing, you have an alternative to generate a bit of growth while keeping your principal guaranteed.  

If your short-term goals are in registered accounts such as a TFSA, an RRSP, or an RESP, we don't currently support the Save account within these accounts, but we do provide a High interest savings ETF - a risk-free investment. 

To learn more about our High interest savings ETF, click here.

To open a Wealthsimple Save account, simply click here. 

If you feel like one of your registered accounts should be in a risk-free portfolio but isn't at the moment, you can submit a request to update your portfolio risk level or theme.

The Wealthsimple Growth portfolio is our high risk portfolio. In other words, we built this portfolio with the goal of maximizing the long-term growth of your account. We expect this portfolio to have the highest returns as markets trend upwards over time (10+ years), but to also suffer the largest short-term losses during a market decline (e.g. a ~40% loss in 2008).

Warning: If you'd like to aim for the highest returns over the long-term, you need to be comfortable knowing that your portfolio can be subject to the largest losses during a market downturn. You should only have this risk profile if you're certain that you wouldn't panic and sell when and if markets drop significantly. Research shows that any investors, especially those new to markets, overestimate their risk tolerance. That's why we typically don't recommend a growth portfolio if you are newer to investing.  

Our growth portfolio has 75-90% exposure to equities and 10-25% exposure to fixed income or bonds. 

This portfolio is ideal for experienced investors with the following situations:

1. If you have a long-term goal (buying a home, retirement, inheritance, etc) that's 10+ years away and are comfortable with seeing very large fluctuations in your account.
2. If you're retired, have a pension or a stable source of income, and are comfortable with large fluctuations in your account. Note: if you're retired and your investments are your primary source of income, a growth portfolio may not be your best option.
3. If you're investing a small amount of your total assets with Wealthsimple and a large loss for that amount would not affect your ability to achieve your goals.
4. If you're investing for a medium-term (~5 year) goal, prefer focusing on growing your money aggressively, but are willing to accept that you may have to push back the objective if markets drop significantly. A flexible time horizon can allow you to take more risks.

If you feel like one of your accounts should be in the Growth portfolio but isn't at the moment, you can submit a request to update your portfolio risk level or theme.

The Wealthsimple Growth SRI portfolio is our high risk portfolio with a focus on Socially Responsible Companies. In other words, we built this portfolio with the goal of maximizing the long-term growth of your account while ensuring we align your investments with your ethics and values. We expect this portfolio to have the highest returns as markets trend upwards over time (10+ years), but to also suffer the largest short-term losses during a market decline (e.g. a ~40% loss in 2008).

Warning: If you'd like to aim for the highest returns over the long-term, you need to be comfortable knowing that your portfolio can be subject to the largest losses during a market downturn. You should only have this risk profile if you're certain that you wouldn't panic and sell when and if markets drop significantly. Research shows that any investors, especially those new to markets, overestimate their risk tolerance. That's why we typically don't recommend a growth portfolio if you are newer to investing.  

Our growth SRI portfolio has 80% exposure to equities and 20% exposure to fixed income or bonds. It is invested in the following funds:

This portfolio is ideal for experienced investors with the following situations:

1. If you have a long-term goal (buying a home, retirement, inheritance, etc) that's 10+ years away and are comfortable with seeing very large fluctuations in your account.
2. If you're retired, have a pension or a stable source of income, and are comfortable with large fluctuations in your account. Note: if you're retired and your investments are your primary source of income, a growth portfolio is most likely not your best option.
3. If you're investing a small amount of your total assets with Wealthsimple and a large loss for that amount would not affect your ability to achieve your goals.
4. If you're investing for a medium-term (~5 year) goal, prefer focusing on growing your money aggressively, but are willing to accept that you may have to push back the objective if markets drop significantly. A flexible time horizon can allow you to take more risks.

Note: The SRI version of our growth portfolio has a fee that is slightly higher than our standard growth portfolio (0.22% instead of 0.10%). 

If you feel like one of your accounts should be in the Growth portfolio but isn't at the moment, you can submit a request to update your portfolio risk level or theme.

The Wealthsimple Balanced portfolio is our medium risk portfolio. In other words, we built this portfolio with the goal of balancing the growth and the protection of your capital. Over the long-term, we don't anticipate this portfolio to have the highest expected returns as markets trend upwards over a long period of time, but it will also provide a fair amount of cushion (or capital protection) during a market decline. That said, this portfolio can still suffer short-term losses during a broad market decline (e.g. a ~20% losses in 2008). 

Our balanced portfolio has 50-65% exposure to equities and 35-50% exposure to fixed income or bonds.

This portfolio is ideal for the following situations:

1. If you have a goal (buying a home, saving for a vacation, etc) that's about 5-10 years away and are comfortable with some fluctuations in your account.
2. If you're retired and are comfortable with some fluctuations in your account.
3. If you have a longer term goal (10+ years) and are willing to take some risks to ensure your funds grow adequately over time but aren't comfortable with very large fluctuations in your account.
4. If you have a longer term goal (10+ years) and are willing to take some risks to ensure your funds grow adequately over time but haven’t had experience with investing or account fluctuations before. This is ideal for first time investors.

If you feel like one of your accounts should be in the Balanced portfolio but isn't at the moment, you can submit a request to update your portfolio risk level or theme.

The Wealthsimple Balanced SRI portfolio is our medium risk portfolio with a focus on Socially Responsible Companies. In other words, we built this portfolio with the goal of balancing the growth and the protection of your capital while ensuring we align your investments with your ethics and values. Over the long-term, we don't anticipate this portfolio to have the highest expected returns as markets trend upwards over a long period of time, but it will also provide a fair amount of cushion (or capital protection) during a market decline. That said, this portfolio can still suffer short-term losses during a broad market decline (e.g. a ~20% losses in 2008). 

Our balanced SRI portfolio has 50% exposure to equities and 50% exposure to fixed income or bonds. 

Your portfolio will be invested in the following funds:

This portfolio is ideal for the following situations:

1. If you have a goal (buying a home, saving for a vacation, etc) that's about 5-10 years away and are comfortable with some fluctuations in your account.
2. If you're retired and are comfortable with some fluctuations in your account.
3. If you have a longer term goal (10+ years) and are willing to take some risks to ensure your funds grow adequately over time but aren't comfortable with very large fluctuations in your account.
4. If you have a longer term goal (10+ years) and are willing to take some risks to ensure your funds grow adequately over time but haven’t had experience with investing or account fluctuations before. This is ideal for first time investors.

Note: The SRI version of our balanced portfolio has a fee that is slightly higher than our standard growth portfolio (0.22% instead of 0.21%). 

If you feel like one of your accounts should be in the Balanced portfolio but isn't at the moment, you can submit a request to update your portfolio risk level or theme.

The Wealthsimple Conservative portfolio (level 1, 2 and 3) is our low risk portfolio. In other words, we built this portfolio with the goal of limiting short term fluctuations while still trying to generate returns that can modestly outpace the rate of inflation. The Conservative portfolio would have declined by only about 10% in the 2008 downturn. 

Our conservative portfolio has 30-40% exposure to equities and 60-70% exposure to fixed income or bonds (depending on whether you're in risk level 1, 2 or 3). 

This portfolio is ideal for the following situations:

1. If you have a goal (buying a home, saving for a vacation, etc) that's fairly short-term (3-5 years) and are only comfortable with small fluctuations in your account.
2. If you're retired and are only comfortable with small fluctuations in your account.
3. If fluctuations in your account make you very nervous but you're okay with a low level of fluctuations to try to grow the funds by more than what a savings account can generate.

If you feel like one of your accounts should be in the Conservative portfolio but isn't at the moment, you can submit a request to update your portfolio risk level or theme.

The Wealthsimple Conservative SRI portfolio is our low risk portfolio with a focus on Socially Responsible Companies. In other words, we built this portfolio with the goal of limiting short term fluctuations while still trying to generate returns that can modestly outpace the rate of inflation. We've also built it to help align your investments with your ethics and values. The Conservative SRI portfolio would have declined by only about 10% in the 2008 downturn. 

Our conservative SRI portfolio has 35% exposure to equities and 65% exposure to fixed income or bonds. It is invested in the following funds:

This portfolio is ideal for the following situations:

1. If you have a goal (buying a home, saving for a vacation, etc) that's fairly short-term (3-5 years) and are only comfortable with small fluctuations in your account.
2. If you're retired and are only comfortable with small fluctuations in your account.
3. If fluctuations in your account make you very nervous but you're okay with a low level of fluctuations to try to grow the funds by more than what a savings account can generate.

Note: The SRI version of our conservative portfolio has a fee that is slightly higher than our standard growth portfolio (0.22% instead of 0.21%). 

If you feel like one of your accounts should be in the Conservative portfolio but isn't at the moment, you can submit a request to update your portfolio risk level or theme.