What is attitude to risk?
Your own attitude to risk is crucial. Some people are happy to live with calculated risks if it means the chance of a higher return in the long run.
Others are risk averse and don't want to risk their capital under any circumstances, while many will sit somewhere in the middle.
Only you can judge what level of risk you feel comfortable with and you should think seriously about whether you can afford to lose money or lock it away for a sustained period.
All investments carry a degree of risk, so you should never invest more than you can afford to lose.
Building a portfolio to suit your level of risk
To work out your own risk tolerance you should think about how much money you could face losing without it having a negative impact on your lifestyle or emotional wellbeing.
Before investing, you need to work out how you would cope if your investments fell by 10%, 30% or 50%, then you can set a limit for yourself.
Find out more: Which? investment portfolios – we have created a unique set of investment portfolios that can help you decide where to invest your money, balanced with how much you're willing to put at risk.
Your time horizon
Your risk tolerance is always linked to your investment timeframe. If you think you'll need access to your cash within five years, the risks of investing are unlikely to be worth taking.
The longer your timeframe, the more able you'll be to withstand short-term losses and see the value of your investment recover.
However, it can take a long time for that recovery to happen and stock markets will always have bad years as well as good ones.
Consider financial advice
A good financial adviser will help you establish your attitude to risk, and assess your capacity for financial loss.
Find out more: Choosing a financial adviser – read our helpful guide to finding the right adviser.