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What is Risk Tolerance? Research Team | Posted On Tuesday, March 24,2009, 07:28 PM

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What is Risk Tolerance?



What is Risk Tolerance

Generally, the more risk involved with an investment, the higher will be the potential return. As a result, the more risk you are willing to take, the more potential your savings have to grow over a long period. Before choosing an investment, you must make sure that you understand the investment, the risk it carries, and how that risk relates to your investment goal. For example, if you are investing for your one-year-old child's education, you can probably afford to assume more risk in your investment than someone whose child will begin studies in the next year. Of course, there can be no assurance that any losses will be made up during the time period.

Short-term investments, like money market funds, offer the least risk. Fixed-income investments offer potentially higher returns with additional risk. Stock investments offer the highest potential returns with the higher amount of risk. A combination of stock investments, money market, and fixed-income, can provide potentially higher returns than either money market or fixed-income investments alone, with only slightly greater risk.

As you close to your goal, your risk tolerance might drop and you may want to change your asset allocation. Defending and protecting your savings might become more important. You might be willing to sacrifice the growth potential of most of your long-term investments in favor of the greater security offered by short-term investments.

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