While a high-risk portfolio may look good on paper, how those investments will affect your behavior and emotional state should be taken into consideration. If high-risk investments cause you significant worry or anxiety over potential market declines, you won't be comfortable owning them.

One approach to developing an investment portfolio that reflects your individual risk tolerance is to consider your investment income needs and your attitude about the potential changes in investment values. If your standard of living is dependent on investment income, your portfolio should be concentrated in investments that provide stable and predictable income. However, if your living needs are covered through employment income, it may make more sense to take a little more risk with your investments, choosing investments with greater growth potential over the long run.

While there is no simple way to determine what risk level fits your emotional makeup and attitude, there are some questions you can ask yourself to gain a better understanding of what type of investor you are:

• Are you confused about investment basics?

• Are you more comfortable with saving than investing?

• Do market fluctuations cause you anxiety? Is that anxiety enough to disturb your day-to-day activities or your sleep?

• Do you require income from your investments?

• Are you investing for the short term?

• Is your financial situation unable to handle short-term losses?

• Are you fearful of losing your assets?

If you answered yes to most of these questions, you are likely to be a conservative investor -- someone who is better off with lower-risk investment choices. On the other hand, if you answered no to most of these questions, you may be an aggressive investor and investments with higher return potential may be a better fit for you. Higher reward potential is subject to greater risk of loss of principal.

By knowing yourself and understanding your financial needs and goals, you will be better able to gauge how you may react to market fluctuations. In turn, this will help you determine what levels of risk to assign to your portfolio to help you meet your financial goals.