GLOSSARY TERM
Risk Tolerance
Risk tolerance means how much investment uncertainty and market ups and downs you can handle emotionally.
What does this mean in practice?
It is about your comfort level when the value of your investments rises or falls. Some people can stay calm during a 20% market drop, while others feel stressed and want to sell. Risk tolerance is personal. It is different from risk capacity, which is about how much risk you can financially afford to take. A younger investor may have high risk capacity because they have time, but still have low risk tolerance if large market swings feel too difficult. Risk tolerance can often be managed by choosing a more balanced portfolio, keeping an emergency fund, investing regularly and avoiding checking the portfolio too often.
Example
Two people invest for the same long-term goal. Both could financially afford a stock-heavy portfolio, but one sleeps well during market drops and the other feels constant stress. Their risk tolerance is different.
Why it matters
Your portfolio should not only look good on paper. It should also be something you can stick with in real life. If your risk tolerance is too low for your portfolio, you may panic and sell at the wrong time.
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