Risk Tolerance

By Greg Parsons, editor

Educational only, not financial advice.

Risk tolerance is how much investment volatility and potential loss an investor can handle — both financially (can you afford a big loss?) and emotionally (can you stay invested through one without panic-selling?).

Why it matters

• Risk tolerance helps determine an appropriate asset allocation between stocks, bonds, and cash.
• A mismatch between risk tolerance and actual portfolio risk is a common reason investors sell at the worst time.
• Risk tolerance can differ from risk capacity — how much risk your finances can technically absorb.

Simple example

• An investor who would panic-sell during a 20% market drop has lower risk tolerance than one who could calmly hold through it.
• A 25-year-old saving for retirement in 40 years usually has more capacity for risk than a 64-year-old retiring next year, even if their emotional comfort with risk is similar.

Risk tolerance vs. risk capacity

Risk tolerance is emotional (how much volatility you can stomach); risk capacity is financial (how much loss your goals and timeline can actually absorb). A realistic asset allocation respects both.

Related terms

• Asset Allocation
• Volatility
• Time Horizon

Learn more

• Risk vs Return
• Asset Allocation Guide