risk tolerance
The degree of variability in investment returns an investor is willing to withstand, influenced by time horizon, financial situation, and psychological comfort.
Example
“A 25-year-old with high risk tolerance holds 90% stocks; a 65-year-old retiree holds mostly bonds.”
Memory Tip
Risk TOLERANCE = how much risk you can TOLERATE (handle) without panic-selling.
Why It Matters
Understanding your risk tolerance helps you build an investment portfolio that aligns with your goals and comfort level, preventing panic selling during market downturns and ensuring you stay invested long enough to build wealth. Without knowing your risk tolerance, you may choose investments that are too aggressive or too conservative for your situation, leading to poor financial outcomes.
Common Misconception
Many people believe risk tolerance is solely determined by age, assuming younger investors should always take more risk and older investors should be conservative. In reality, risk tolerance depends on multiple factors including your financial goals, emergency fund status, income stability, and emotional comfort with losses, making it highly individual regardless of age.
In Practice
A 35-year-old with a stable job, a fully funded emergency fund, and a 30-year investment horizon might have high risk tolerance and invest 90 percent in stocks, while another 35-year-old who is self-employed with irregular income and plans to retire in 10 years might have moderate risk tolerance and invest only 60 percent in stocks, because their different financial situations create different comfort levels with potential losses.
Etymology
From Old Norse 'riskr' (danger) + Latin 'tolerare' (to bear, endure).
Common Misspellings
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Related Terms
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See Also
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