How Much Volatility Can You Take?

Diversifying your portfolio across stocks, bonds, and funds that will behave differently at various points in time can help reduce short-term volatility. It may also help to remember that putting up with day-to-day gyrations in your portfolio is likely to help stave off that biggest risk of all: not having enough money when it comes time to tap your portfolio. By doing that, you're acknowledging that In the ideal world, your time horizon and your goal would determine how much volatility you'd tolerate.

Be human about it

You're not an emotionless robot who doesn't react to volatility, though. You're human. As such, consider how volatility may interfere with you meeting your goal. Then do whatever you can in your portfolio to thwart the factors that lead to volatility. In other words, limit your risk by diversifying across a variety of markets and companies.

Finally, answer these questions to develop your investment philosophy about volatility and risk:

• How much of a loss can you accept from your portfolio each year?
• How much of a loss can you accept over a five-year period?
• How much risk can you accept from your individual investments?
• How do you plan to diversify your various investment risks (market, company-specific, economic, and country)?
• What risk-related test will an investment have to pass before making it into your portfolio?