With the start of the new financial year, investment is one of the major decisions an individual faces. Investment has the promise and potential to help you reach your financial goals. But the desired results are dependent among other things on the right asset allocation. The process of determining the mix of assets to hold in your portfolio is dependent on life’s financial goals.

The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.

Time Horizon - Your time horizon is the expected number of months, years, or decades you will be investing to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile investment because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets. By contrast, an investor saving up for a teenagers college education would likely take on less risk because he or she has a shorter time horizon.

Risk Tolerance - Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. An aggressive investor, or one with a high-risk tolerance, is more likely to risk losing money in order to get better results. A conservative investor, or one with a low-risk tolerance, tends to favour investments that will preserve his or her original investment. In the words of the famous saying, conservative investors keep a bird in the hand, while aggressive investors seek two in the bush. 

When it comes to investing, risk and reward are inextricably entwined. Youve probably heard the phrase no pain, no gain - those words come close to summing up the relationship between risk and reward. Dont let anyone tell you otherwise: All investments involve some degree of risk. If you intend to purchase securities, such as stocks, bonds, or mutual funds, its important that you understand before you invest that you could lose some or all of your money.

The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long time horizon, you are likely to make more money by carefully investing in asset categories with greater risk, like stocks or bonds, rather than restricting your investments to assets with less risk, like cash equivalents. On the other hand, investing solely in cash investments may be appropriate for short-term financial goals.