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Risk, in investment terms,
means fluctuation in returns. Risk tolerance, therefore, can be described as how
comfortable you are with the possibility that your investment’s value will fluctuate.
Knowing how much risk you can stand is a crucial first step in developing an asset
allocation to help reach your financial goals.
Generally, the two biggest factors affecting a person's risk tolerance are personal
temperament (if you're not a risk-taker in everyday life, you probably won't want a lot of
fluctuation in your investment portfolio, either) and investment time horizon (if you have
a long time to reach your goals, you might be able to accept more short-term fluctuation).
To learn more, see the chapter on "Risk" in Wall Street 101. (Link) |
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