Know yourself

Understand your tolerance for risk

In the investment world there is a direct relationship between expected returns and risk - the higher the expected payback from your investment, the higher the risk. Before you can decide on a personal investment strategy, you must consider how much or how little risk you are prepared to take with your money.

Your risk tolerance can be affected by:

Time horizons

 the amount of time you have to meet your financial goals and to make up for any losses you might experience. People with long time horizons may be more willing to endure periodic fluctuations in the value of their investments.

Cash requirements

 the extent to which you depend on your investments to meet day-to-day expenses. Investors who rely on their investments to meet daily living expenses will be much less comfortable with the risk of losses.

Emotional factors

 your emotional response to risk and to changes in the value of your investments. Some people are quite comfortable with the ups and downs of the market, while others lose sleep when their investments fluctuate in value.

There is no 'right' answer to the question, "How much risk should I take?" Risk tolerance is a personal issue. You should never feel obliged or pressured to take more investment risk than you are comfortable with.

Take our risk test to help determine how much risk you feel comfortable with.

Remember though, that there is no such thing as a high return-risk free investment. The promise of guaranteed high returns with no risk is a red flag that suggests the investment might be a scam. You cannot expect to be rewarded with high returns on your investments if you are not prepared to accept the risks that go with them.

Learn about other indications that an investment might be too good to be true in our Red-Flags section.

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