Let's first define what we mean by risk and risk tolerance. All investments have some form of risk, whether it's inflation eating away the returns of fixed-income investments such as bonds or the wild price swings of some stocks. Financial professionals typically define risk by how volatile an investment is: how widely its value will swing from top to bottom. They generally define risk tolerance as how willing investors are to endure this volatility.

Investors, on the other hand, tend to view risk only in one direction: down. To them, there's no "risk" when investments are going up, only when they're going down. That's not necessarily a bad perspective. After all, the real risk in investing is failing to meet the financial goals you invested for in the first place.

Many investors are just now beginning to grasp the concept of investment volatility because, as the market has now shown, to go up always entails the risk of going down. In short, there's no reward without risk. That's a good thing, say many financial planning professionals, because investors should use this new awareness as an opportunity to make sure their investments are aligned with their tolerance for risk, and make adjustments if necessary.

For example, were you awake every night worrying during the stock market's decline? Did you sell in a panic? Perhaps investing in the stock market isn't for you, or perhaps you need to invest more conservatively. Perhaps a diet of tech stocks is just too rich.

When reassessing your investment portfolio, keep in mind that while investment professionals may define risk primarily in statistical terms, investors also define it psychologically. How psychologically comfortable you are about investment risk depends on many factors. Here are a few of them.

Why are you investing in the first place? From a financial planning perspective, a person should take on the risk of investing for one major reason: to enhance the ability to achieve certain goals. Because investing involves risk (generally, the higher the risk the higher the reward), you should not take on more risk than necessary to reasonably earn the reward needed for achieving those goals. And those goals should be long term: you don't invest to buy a car in a year, but you do invest for college or retirement. Usually these goals require only modest returns compounded over many years-not exceptionally high returns crammed into a few years.

Have realistic expectations. This should be easier to do today than it was in 1998 and 1999 when the market was booming. Back then, many investors had exaggerated visions of future returns (some investors still do), thinking double-digit gains would occur every year. Learn how investments historically have performed over time. Stocks, for example, have averaged around 11 percent a year since 1926, and some investment professionals argue that we won't see even those kinds of returns for quite a while.

Educate yourself about risk. The more you understand about the potential risks and rewards of specific types of investments, the better able you will be to pick the appropriate investments for you. Knowledge also reduces panic when markets turn rough or excessive exuberance when markets climb.

Use diversification to dilute risk. A well-diversified portfolio is your best protection against risk. By mixing investments of different risks, you usually can reduce the overall volatility of your portfolio while still providing returns strong enough to achieve your goals. This can go a long way toward alleviating some of your fear of investment risk.

Improve your ability to incur risk. A sound emergency fund, proper insurance, stable income and overall good financial health can increase your capacity to take on greater risk-and thus potentially earn a greater reward.