What's Right for You?
The core elements of your portfolio should include a combination of stocks, bonds, and cash. To what extent you maintain exposure to stocks depends on how much risk you're willing to endure for the promise of greater returns. Sometimes the riskier the investment type, the greater potential for a higher return over a long period of time.
Determine Your Risk Tolerance
So when you begin to build your investment portfolio, it's important to first determine what role stocks should play in your overall asset allocation. To do this, you must first establish your tolerance for market risk.
To help you determine your own level of risk tolerance, consider the following questions:
If you answered "a" to both questions, you probably have a high tolerance for market risk and may wish to allocate a larger portion of your investment to stocks.
If you answered "b" to both, you're probably medium tolerant and would do better with a portfolio balanced with a mix of stocks, bonds, and cash.
If you answered "c," you probably have a lower threshold for market risk and may prefer a comparatively lower designation of stocks.
Of course, there may be other factors--such as age, income, financial goals, etc.--that you should consider when determining your investment risk and portfolio allocation.
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