Summary of Risk Tolerance

The risk-return tradeoff is an inherent part of investing: riskier investments tend to hold out the promise of higher returns, and safer investments tend to have smaller returns. As a result, the amount of risk you can afford to take on—your risk tolerance—plays a large part in determining how much return you can expect from your investment. Your risk tolerance is determined by such factors as how much you depend on your capital, how long you have to hold your investments, and how much investment management you can do yourself (or pay an advisor to do). Fortunately, it is possible to manage the risks of your investments and increase your risk tolerance, benefiting from the potential of higher returns in the bargain.