Myth 3: Equities are too risky

You’ve probably heard this many times - stocks are too risky. While it’s true that equities as an asset class do tend to be more volatile - or experience more ups and downs - than bonds, it’s also true that over the long term they tend to produce much higher returns.

Here’s one reason why. When you buy a stock, you own a piece of a company. That ownership means you get to share in the company’s successes and there’s really no upper limit to the amount you can earn in profit.

When you buy a bond, you’re effectively lending your money to a government or company, and that government or company agrees to pay you a fixed amount of interest on the loan. It’s still risky though, because there could be a default on the loan. And, there’s a maximum amount you can make on your investment because the rate of return is fixed.

Myth 1 Myth 2 Myth 3 Myth 4 Myth 5 Myth 6 Myth 7 Myth 8 Myth 9

This chart shows the 5-year performance of an equity-based index - the S&P/TSX Capped Financial Index - compared to the Scotia Capital 91-Day Canadian T-Bill - a bond index, against Canada’s Consumer Price Index, which is a measure of inflation.

As you can see in this example, the Canadian financial services index has grown by 117% over 5 years, compared to the bond index at 14%, which has barely beaten the Consumer Price Index of 11%. And the results are quite similar over a ten-year period.