Cash Several factors will impact the exact rate of return that you receive on your investment portfolio. Here are several factors to consider as you make this decision. Your Ideal Asset Allocation will be Influenced by Your . . . As discussed in Unit 1, as people move through various life stages, their needs and financial goals change. Your Risk Tolerance Risk tolerance is a person's emotional and financial capacity to ride out the ups and downs of the investment market without panicking when the value of investments goes down.
Risk tolerances vary widely.
Some are associated with personality factors, while others are based on changing needs dictated by your stage in the life cycle. If you won't sleep well at night when the principal value of your investment goes down, you should select saving and investment options with lower risk. On the other hand, it's important to realize that investments which guarantee the safety of principal will not grow your money quickly and may not maintain purchasing power in times of inflation or over a long time span. In reality it's necessary to take some risk just to maintain purchasing power. As discussed earlier, time is a very important resource to investors.