What is risk and how do you determine my risk profile?

When you open a managed portfolio with Wealthsimple, we assess your risk profile based on your goals, timeline, financial situation, and comfort with risk. We use this to match you to the portfolio that gives you the best chance of reaching your goals.

Understanding passive investing

Wealthsimple uses a passive investment strategy, which means your portfolio will track the performance of the global market. Historically, stock markets have almost always trended upwards over a long enough period of time. However, they don't go up in a straight line — stock markets fluctuate constantly but trend upwards.

So what does risk really mean?

Risk (or volatility) is 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. If markets fall, you're likely to have larger losses. Taking lower levels of risk leads to less volatility.

Risk is managed through asset allocation — how much of your money is in stocks (equities) versus bonds (fixed income). Stocks have historically generated greater returns over the long term but come with more fluctuation. Bonds provide a steady, lower source of interest income with smaller fluctuations.

How does Wealthsimple assess my risk?

Using your investment goal, time horizon, income, net worth, and personal comfort with risk and potential loss, Wealthsimple determines how much risk your investments should be subject to. We also check your household financials — including emergency fund status, debt levels, financial cushion, and source of funds — to make sure the recommendation is appropriate for your situation.

What are the risk profiles?

Wealthsimple's managed portfolios use four risk profiles. Each profile corresponds to a different mix of stocks, bonds, and gold:

Learn more about updating your risk profile.

Time horizon and risk

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. With that in mind, the so-called "risky" assets may actually be less risky over the long term.

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. 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, you might view the risks differently. The stock market has only lost money in 3% of all 10-year periods. Over 20-year holding periods, stocks have never returned less than inflation.

Many people are afraid to invest in stocks because they believe them to be too risky. But the data show that over long periods of time, the risk of investing in stocks is much lower than commonly thought. Investors who avoid stocks to avoid volatility pay a steep price in the long run.

None of this means that there's no place for bonds in your portfolio. Their role is to reduce volatility. If you're in or approaching retirement, this is important. But even if you're not in that phase of life, you might find 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 stay invested, it's well worth it.

When should I be in a risk-free portfolio?

If you have money set aside for short-term goals (less than three years), such as a down payment, a car, or a vacation, how should you invest it?

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.

Over a one-year period, there's a 35% chance of losing money on the stock market. Over a two-year period, there's a 25% chance. Over a three-year period, there's a 15% chance.

For short-term goals, protecting the money becomes a priority to ensure you don't have losses by the time you need the funds.

If your short-term goals are in registered accounts such as a TFSA, an RRSP, or an FHSA, we created a Registered Savings Account that lets you grow tax-sheltered savings, risk-free. Learn more about our Registered Savings Account.

If you feel like one of your registered accounts should be in a risk-free portfolio, you can update your portfolio risk level.