How to tailor your investment plan to your risk tolerance

Investing can be scary. Think about it - you are placing a great deal of your hard-earned money into an investment that not only has the potential to bring a great return, but to clear you out of your cash as well. However, investing is also an exciting thing that need not be stressful. For this reason, it's important to tailor you investment plan to your risk tolerance.

The following are a few tips to help you tailor your investment plan to your risk tolerance.

Know that there will always be risks
By definition, investing will always carry a number of risks. Risk is defined as the possibility of gain or loss on your investments.These risks can include losing money if the market fluctuates (which it inevitably will), being too cautious with your investments and in turn not beating inflation, or not saving enough or at all. That's why it's important to realize that investing will have risks associated with it, regardless of whether you want to take them or not. Knowing this before you begin your investment plan can help you make a more realistic plan in terms of risk.

Know where you stand
Many experts state that in terms of risk, the younger you are, the more willing you will be to take on risk. That doesn't mean you need to be investing the vast majority of your funds into investments, but you should be willing to put some money into a retirement account like a 401K or an IRA. These are fairly risk-free and will give you more money for your retirement or to invest with in the coming years.

If you have a great amount of time, like 20 years, before you need to access your retirement funds, you can probably afford to take more risks than someone who, say, is five years away from collecting retirement funds.

Diversify
One way to reduce the risks associated with investing is to plan for diversification. By putting your money into a variety of investment options, you can reduce risk because your money is spread out over a number of investments instead of just one. Consider cash equivalents, stocks, bonds, treasuries, and mutual funds - there are many ways you can invest your money. In addition, diversify within specific asset classes as well, including different types of stocks within your portfolio.

Invest for the long term
Studies have shown that you are more likely to achieve higher returns on high-risk investments over the long term rather than the short. The market will always experience highs and lows, but allowing you investments to grow instead of expecting to become independently wealthy after a year or two can actually give you a better return.

Consider professional help
If you feel like you're unqualified or could use some reassurance and advice when it comes to investments, consider an investment manager. Part of an investment management service's job is to help you be aware of the risks associated with investing. This can include helping you to set reasonable goals and objectives and then tailoring their services around your risk tolerance. A good investment manager will also be willing to discuss your goals, questions, and concerns with you as often as possible in order for you to be comfortable with your investments. These services do not come cheap, but they may be worth it.