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Before You Start Investing: Assess Your Investment Risk — Understanding Your Risk Profile
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Understanding Your Risk Profile

Understanding Your Investment Risk Profile

Any investment involves some level of risk. Any investment opportunity has its unique risks and potential rewards.

That’s why you need to understand how much risk you can accept, even before you start investing.

Understanding your personal risk profile will help you choose investments that will let you sleep easier while your money will be working for you.

It is also important to keep in mind that your risk profile affects how much money you may accumulate. The less risk-averse you are, the more your potential gain as well as your potential loss. Aggressive investing involves more risk but may bring higher returns over the longer term. Conservative investing may not earn you the highest profits in the market, but it’s more likely to keep your money relatively safe.

Your risk profile will help you see what type of investor you are, whether conservative, moderate, or aggressive.

There are many methods you can use to figure out your risk profile. Consider your investment goals, investing timeframe, as well your investment knowledge and experience. Decide how comfortable you are, personally, with taking risks. These are all important factors to bring into the equation.

There are also three different components to consider:

  • Risk Tolerance: How much risk you’re willing to take in your effort to get better returns.
  • Risk Capacity: How much risk you can afford to take without risking your objectives.
  • Risk Required: How much risk you have to take to meet your objectives.

“Successful investing is about managing risk, not avoiding it.” — Benjamin Graham

Tap Next to explore each of these components in more detail.