“”Risk and investing go hand in hand. How can people work out what sort of risks they are prepared to take in the pursuit of wealth?”

Who are you more like? Actor Rob Lowe, a pioneer of celebrity sex tapes? Or Pretty In Pink’s Molly Ringwald, who moved to France to marry a Frenchman?

Both risks were career suicide, though they didn’t know it at the time. Rob’s underage ménage-a-trois video cost him a decade. And has anyone found Molly yet?

First-timers rarely understand the inherent risks of investing. But understanding risk doesn’t mean you’ll never lose money. Many professionals lost buckets of cash between November 2007 and March 2009.

Nothing will beat sitting down to do a thorough risk profile exam. (There’s a very basic one at www.debtman.com.au.) But there are four key things to keep in mind.

First, higher returns mean taking on higher risks. The risk chart runs in this order: cash; fixed interest; property; shares. As you move along that list, the chances of doing your dough (or doing a “D’oh!”) increases.

Second, time is like Oil of Ulan. It smooths out the risk wrinkles. If your financial plan is long-term, you should be able to take higher risks. If your goal is short-term (less than two years), stick with low-risk.

Third, gearing magnifies risk. Borrowing to invest can be a powerful strategy – particularly for Gen Xers – if you have a sufficiently long investment time frame and patience.

Fourth, it doesn’t have to be all or nothing. You can take larger risks with just a portion of your portfolio.

Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser.