There have been many articles lately about investing amid turbulent portfolios and what some have perceived as “good deals” in the market. But what I think is even more important to understand – and something my colleague, Sonia Spekkens of Cowan Financial Solutions, recently wrote about – is understanding risk.

In her upcoming newsletter article, she provides some tips and questions to investors to ensure they balance the risk and rewards of investing. “Understanding the relationship between risk and reward is a key piece in building your personal investment philosophy,” she says.

1. Carrying risk – Everything carries “risk.” Understand where your comfort level is. Is safety of principal more important than growth? How much risk are you willing to take on to achieve higher returns?
2. Am I going to lose money? – This is the most common risk when it comes to investing. Are you willing to accept a low return to safeguard your principle?
3. Will I achieve my financial goals? – There are four factors that will answer this question: How much have I invested? How long will my money stay invested? What is the rate of return or growth on the investments? How much do I need to deduct for from this rate of return for fees, taxes, inflation etc. 
4. Am I willing to accept higher risk? -If you are five years away from retirement, you will probably not want to take extraordinary risks with your nest egg, because you will have little time left to recover from a significant loss. If you are in retirement, you need to ensure you have a good balance of growth and fixed income investments, layered with a non-fluctuating pot for those funds that are required annually to cover your expenses.

Your comfort level with risk should pass the “good night’s sleep” test, which means the amount of risk in your portfolio should not worry you so much that you lose sleep over it.