Canada has a new Regulator overseeing everyone working in the investment industry (other than the bank branches). The Canadian Investment Regulatory Organization (CIRO) is a welcome change from the conflicting regulators which preceded it.
What better time to bring new thinking to the industry!
In my long and varied career, I've found that the best impactful changes occur when we challenge a fundamental assumption we all carry in our minds. The assumption that I'd like to challenge is that people need a
very simplified, single number that evaluates the financial riskiness of an investment. The measurement we have now is not working!
One of CIRO's top priorities should be to review how we evaluate the risk of investments. Currently, investments are given a single rating, Low, Low-Medium, Medium, Medium-High, or High. Currently, these risks are determined
solely by looking at short-term volatility. Guaranteed investments have Low ratings on this scale, and speculative stocks have a High rating.
However, as shown in our article
What is Risk, these ratings don't reflect the long term lifestyle risks on Canadians once inflation and taxes are taken into account. We show why informed investors do not lock away their long term nest egg in guaranteed investments. They know that these investments lose purchasing power over the years! The current risk assessment of Low is not valid for guaranteed investments over the long term, as the inflation (and possible tax) risk implicit is too impactful on Canadians' financial futures.
In a separate article, we recommend replacing the word Risk entirely in the financial industry, as it is too heavily loaded with negative meaning. But assuming that the word risk will stay for the foreseeable future, we call on CIRO to produce a measure that combines volatility and historic returns over 5- to 10-year time horizons. This new measure should be helpful to guide Canadians in investing with the long-term perspective that is necessary for financial success!
I would be happy to participate!
