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Evaluating Your Financial Risk Profile during Economic Uncertainty

Part of the Investing in an Uncertain Economy For Dummies Cheat Sheet

Have realistic expectations of market behavior during an uncertain economy so you're ready to implement an appropriate investment strategy. Consider three perspectives that together make up your financial risk profile and design your investment portfolio based on the lowest level of volatility:

  • Risk capacity: How much risk should you take, assuming a worst-case scenario? Take into account your age and family situation, your income, and your other assets and resources. Keeping these factors in mind, how much risk should you take to achieve your goals?

  • Risk tolerance: How much risk can you take? Consider your ability to stick with your investment plan without losing sleep or getting stressed out. Do not take on any more risk than you can comfortably tolerate.

  • Risk required: How much risk must you take? You are exposed to certain risks whether you like it or not. However, many financial risks can be minimized or avoided. To do so usually means that you must accept a lower return on your investments. To meet your personal goals and objectives in the time frame you'd like, you need to take some risks, but take no more risk than you must to achieve your goals.

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