Holding equity investments for the long-term: there are substantial benefits in holding riskier investments for the long-term

Money Digest, May, 1999 by David Karas

Think carefully about your appreciation and desire for new and improved financial products. As you age, your requirements and willingness to accept risk will change. Yet, it is the acceptance of risk that you get paid for.

In all areas of life, risk usually has the highest payoff if you are right. If you are wrong, risk provides the greatness negative consequences. This is evident even in the way that you are taxed on invetments. Low risk capital investments, such as GICs and savings accounts or term deposits, are taxed fully, with no tax deferments, just like regular income.

In a risk-free fixed interest investment that has no potential for capital loss, the government sees no "risk premium." Therefore it taxes you fully. Please note that a bond is not a risk-free investment. As bonds can have a capital loss, the face or principal part of the bond can have a capital gain or loss as interest rates fluctuate.

Yet there is a risk in that type of investment that you do not see. That risk is the loss of purchasing power of your money, different from the loss of return of capital.

As we head through volatile times, investors and savers get clearly distinguished.

An investor is a individual who invests his or her capital in assets, looking for growth in the purchasing power of their capital, not just the return of their capital. The government says that, because of the risk of loss of capital, investors get special tax treatment.

Capital gains and dividend tax treatments give significant advantages to the investor.

Under capital gains taxation, taxes are deferred until the investment is sold. Savers are taxed on a yearly basis, even if they do not take the money into their hands.

Savers suffer loss of purchasing power due to inflation. Investors are more likely to win as inflation makes the value of things [businesses, hard assets, and real estate] go up in value. Or another way to express this is the depreciated purchasing power of money causes a need for more money to buy the same hard asset.

Historically, savers have less gain [generated profit or rate of return] to lose than an investor in stocks or real estate. In inflationary times, real estate investors do extremely well.

Remember that if you take a long view of your finances, you will see the benefit of staying invested in areas with a risk premium. It is the best way to ensure that you have the future you want.

David H. Karas, CFP, RFP, of Money Concepts, is an Investment and Tax Planning Specialist. He can be seen hosting The Money File on The New VR each weekday morning. Phone 1-800-870-8522.