Risk Tolerance — How do you really feel about risk?
Get personal with your risk personality
Every investment decision you make involves dealing with some kind of risk. So it’s a good idea to be honest about your risk personality. Where do you fall in that vast middle ground between wild and mild? Do you lean more towards playing it safe or are you okay with sometimes going a little further out on the edge? Knowing where you fall on the risk tolerance scale can help you make more informed investment decisions.
Consider outside factors
Your tolerance for risk goes beyond your personality. It’s also driven by:
Time your tolerance
As you get closer to retirement, your tolerance for risk may decrease. Your desire to protect your savings will begin to trump your desire for maximum returns. You’ll probably want to lower your market risk by reducing your stock allocations and increasing allocations to more conservative investments, such as bonds, guaranteed products like annuities and money market accounts.
Make it a good fit
There’s no right or wrong risk strategy. First, understand your risk profile, then find a balance between the returns you need to achieve your goals and the level of risk you’re comfortable with. You can always loosen things up if your risk tolerance feels like it’s cinched a little too tight or tighten the reigns if you're not comfortable with you current level of risk.