What Is Risk Tolerance?
How much ups and downs in the value of your investments you can handle — both financially and emotionally — without bailing out.
Risk tolerance has two halves. The financial half is your capacity: how long until you need the money, and whether a drop would force you to sell. The emotional half is how well you sleep when your balance falls 20% in a month.
It usually shifts with your time horizon. Money you will not touch for decades can ride out crashes, so it can hold more volatile, higher-growth assets. Money you need next year should sit somewhere safe, because it has no time to recover.
If a temporary 30% dip would make you panic-sell your whole stack, your real risk tolerance is lower than you think — and a calmer, more diversified setup will serve you better.
Key points
- Combines your financial capacity and your emotions.
- Longer time horizons allow for more risk.
- Knowing it keeps you from selling at the worst moment.
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