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Your risk tolerance

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One of the things that determines your investment personality, and ultimately what your retirement savings plan might look like, is your tolerance for the risks associated with investing.

How to get started? Take our Investment personality questionnaire  to help you determine your risk profile. It’s a good idea to take the questionnaire again after major life events, like buying a house or getting a big promotion, and as you get older. These events can have an impact on your savings goals, which are big factors in determining your risk tolerance.

What are some risks that go along with investing?

Inflation risk - The possibility the money you’ve invested will decline in real value because of inflation. In other words, the rate of return you get on your investments is lower than the rate of inflation on the goods and services you’ll buy in the future.

Market risk - The likelihood that an investment market, such as the bond market or the stock market, will decline in value, including the investment option that you’ve chosen. The reason for market increases and declines varies, and is called market volatility.

Business risk - The risk of investing heavily in a particular industry or environment. That particular industry can develop an issue that doesn’t affect other industries, for example a strike or lack of raw materials.

Timing risk - The possibility that you could buy or sell an investment at the wrong time. People try to buy low and sell high, but timing the market takes more experience than most of us have.

Want to manage risk in your investments? Take advantage of diversification. Choosing a variety of investment funds, with holdings in a wide range of securities and industries, allows you to avoid putting all your eggs in one basket. 

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Next lesson: Your savings style