Diversification: The idea of spreading out your money across many different types of investments. Choosing to diversify your investment holdings reduces your risk tremendously.
Risk Tolerance: An investor’s ability to withstand losses caused by one or more of the different types of risk. This ability can be limited by your temperament as well as your time frame and financial circumstances. For example, someone who is investing for a goal 10 to 20 years or more in the future generally has a higher risk tolerance and may feel more comfortable with riskier investments than a person whose investment goal is only 5 years away or less.
For more information, visit the show notes at http://www.moneyguy.com/2007/09/mastering-the-world-of-investing