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In order to reach your financial objectives, you must choose from diverse investment alternatives-all of which vary greatly in the degree and type of risk and potential return. The key to developing a sound portfolio is to strike the right balance between potential reward and risk, based on your financial objectives, financial situation and investment style.

The Many Faces of Risk

The risk that the economy will suffer a downturn as a whole. Such an event generally affects all the financial markets across the board, from product prices to the job market.

Industry Risk

The risk that a specific industry will suffer a downturn. Often, industries related to the one that experiences problems will suffer as well.

The risk that high taxes will make investments less profitable for both businesses and investors. Businesses that have to pay higher tax rates often have less capital to go around and, as such, cannot expand or improve. Investments that carry heavy tax baggage generally lead to lower dividends for an investor.

How Much Risk Is Right for You?

To determine your own risk comfort level, ask yourself this: Are you willing to tolerate greater volatility for potentially higher returns from your investments, or do you place more emphasis on quality, with less risk?

Several factors may influence the amount of risk you can comfortably accept in your portfolio, including:

• Your age
• Family situation
• Income

• Financial goals

In addition, the markets evolve and your personal goals will inevitably change with time.

Your Financial Professional Can Help

One of the best ways to keep your investments on target is to meet with your financial professional regularly. In these meetings, you and your financial professional can discuss your investment objectives, determine your individual risk tolerance level and help you understand the various risks associated with an investment.

Your financial professional can also help you build a portfolio that has the potential to provide the highest returns consistent with the amount of risk you wish to assume.

How Can You Choose Which Risks to Take?

Whenever you consider a new investment, you may wish to ask your financial professional the following questions:

What types of risk are involved?

Once your financial professional has explained the risks, ask how he or she can help you to manage or minimize the different kinds of risk for the investment you are considering. Not all kinds of risk will apply to every investment.

What could happen to my principal in a worst-case scenario?

How will adding this investment to my holdings help to manage my portfolio’s overall risk?