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Your risk tolerance and
the return you require or expect from your portfolio are two primary
considerations when designing an investment strategy.
When discussing risk, ensure that your
financial advisor has the same definition that you have. Most financial
advisors think of risk in terms of volatility, but many clients think of
risk as maximum expected amount of loss. The two definitions will not
necessarily lead to the same type investment program.
Portfolio returns can come in several forms:
capital gains, dividends, and interest. If you are subject to taxation on your
investments, then it is important to consider after-tax returns. Equally
important is to account for inflation. You can earn a practically risk-free rate
of return in a money market or savings account, but you may actually be losing
money in terms of buying power if the interest you earn after taxes does not
keep up with inflation.
There are
specific forms of risk inherent to every investment, but generally risk can be
broken down into that associated with the individual holding (unsystematic risk)
and that associated with the market as a whole (systematic risk).
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