Investment Risk Tolerance and Time Horizon

Your time horizon determines how much risk you can take. Keep your risk tolerance at your sleeping level.

How much risk should you take on? Just enough to reach your goals and not lose any sleep while doing it. Your time horizon actually dictates how much risk you can take. If your goal is to accumulate $10,000 for a down payment on a home that you would like to purchase in one to two years, your time horizon is very sort. With a short-term time horizon, you want to use low risk investments vehicle; you don't want to assume much if any risk. You want to be sure that, if you find just the right house, your money is sitting there waiting for you. Using a money market account to hold your money while accumulating the down payment would be a good choice here.

If the goal is a comfortable retirement and you're 30 years old right now, your time horizon is very long. Your have a long time to invest, but more important, you have time on your side---time to ride out the ups and downs of the stock market. So with 30 years or more before you will need the money to reach your goal, you can assume a lot more risk wit it. Here, you venture into the middle of the medium risk investment vehicles such as look at growth mutual funds and stocks for your retirement portfolio.

If the goal is to put the baby through college and the baby has just started middle school, you have about six years before you need the cash to make the first tuition payment. You can take on more risk than you would wit the down payment for a house, investing in stocks and growth mutual funds, but as you get within a year or two of that first tuition payment, you want to be sure you have tempered some of the risk by putting the first year's expenses into a money market account. This way, the money is available no matter what happens in the stock market.

Allow me to pontificate here for a moment. When the stock market is doing well, and that has led investors to believe that the only way the market travels is up. Wrong! Markets can go down wit a bang, and you could lose a lot of money. At times in our adult lives, it is truly better to be prudent.