Learn about investing essentials.
Risk tolerance is an investor's ability to weather declines in the value of his or her portfolio. Those with low risk tolerance may be better suited to a conservative investing stance relying for the most part on fixed investments. Conversely, those with high risk tolerance may be better suited for more aggressive investments.
This is the process of distributing investments across various asset classes (types of investments) in an attempt to moderate the inevitable ups and downs of the market. While fixed investments (fixed annuities, bond funds, money market funds, and the like) remain steady, mutual funds tied to the stock market (which are known as equities) fluctuate, especially over short periods of time (less than five years).
The market, which is often defined by the S&P 500 [link to term] can fluctuate wildly in the short term. This can lead savers to make short term decisions such as changing asset allocation to reflect current market conditions. It is important to note that for many employees, retirement is a long way off. Over time, market fluctuations tend to smooth out. This underscores the importance of proper asset allocation [link to term] for your individual goals, age, and financial situation.