Step 1: Determine Your Risk Tolerance and Investor Profile

The first step is to understand your stock market risk and your maximum drawdown. Chapter 2, “Understanding the Concept of Risk,” focused on those issues, and you should be able to classify yourself as a conservative, moderate, aggressive, or very aggressive investor. Keep in mind that you may have different investor profiles for your retirement and nonretirement accounts due to your age, income, funds available for investment, years to retirement, and other factors. One interesting current report on investor psychology and risk is provided by Kiplinger’s Personal Finance at www.kiplinger.com/reports/investor-psychology.