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Find the Appropriate Financial Risk Level

Taking the Right Amount of Investing and Financial Risks Can Help You Build a Healthy Financial Future

If you want to build wealth you need to take risks. The higher level of risk that you take, the higher your return should be. With that said, only take the risks that are appropriate to you.

For example: You have the choice of investing in a savings account, a money market account, a certificate of deposit (CD), a bond fund, a large cap stock fund and an aggressive mutual fund (mostly tech stocks). Each investment has a different level of risk and each investment makes sense for different people. Typically, the higher level of risk that you take, the higher your potential investment return. The right investment for you depends on many things, but the two most important factors are 1) your realistic time horizon, and 2) your aversion to risk.

Regarding time horizon, if you have 40 years before retirement, you should invest your money in the highest risk, highest yielding sectors (maybe 70% stocks, 15% bonds and 15% money markets). But if you are already well into retirement or can't afford to risk your investments, the majority of your investments should be allocated toward the low-risk investments such as savings accounts, money market accounts, CDs and maybe even a bond fund.

Regarding risk aversion, you must make this decision yourself. If you have trouble sleeping at night because you're investing in stocks, you should probably sway toward the lower risk investments. Different investors have different tolerance for risk.  Risk takers tend to be more aggressive than they should and risk averse investors are usually too conservative.  Try to stay somewhere in between the two to find a safe portfolio that can still offer market beating returns.

The major takeaway from this section is that it is important to take risks. The more risk you take the more you can expect to earn and accumulate over the long-term. However, be conscious of yourself and your goals and do not take more risk than your time horizon or your own personality will allow.

The next rule is to save your money.