We all fear the possibility that a stock or bond we invest in will fall substantially. But the volatility in stocks, bonds and their markets is the reason that you can expect to earn a higher long-term return from these investments than you can from more conservative investments. Different types of mutual funds have different levels of volatility or potential price change, and those with the greater chance of losing value are also the funds that can produce the greater returns for you over time. Assessing Your Own Risk Tolerance Typically, risk is defined as short-term price volatility or variability. Before you start an investment plan and structure and investment portfolio you must start with an honest appraisal of your own personal comfort zone with regard to risk.
Some investors can accept short-term volatility with composure, others with near panic.
So whether you consider your investment temperament to be conservative, moderate or aggressive, you need to focus on how comfortable or uncomfortable you will be as the value of your investment moves up or down. A good barometer in judging your risk tolerence is if you can't sleep at night for worry about the value of your mutual fund shares, you are being too agressive with your investments. Recognizing the type of investor you are will go a long way toward helping you build a meaningful portfolio of investments that you can live with. All investments involve some form of risk. Even a federally-insured bank account is subject to the possibility that inflation will rise faster than your earnings, leaving you with less real purchasing power than when you started.