Every investment you make has a risk factor as well as a potential reward. Risk relates to return – generally, the higher the risk, the high the expected return, similarly, the lower the risk, the lower the expected return.
Understanding this risk tolerance will help you determine an appropriate asset allocation, time frame and suitable investments.
Some people are comfortable with higher risk investments because they offer the potential for higher returns, others are more conservative and prefer more defensive investments such as fixed interest. When investing, it’s important to understand that the level of return will differ between asset classes.
Once you have established your risk profile – from conservative through balanced to growth – investments should be selected to suit your risk profile.