What Is Risk Tolerance? Meaning & Example
Definition
Risk tolerance is how much investment loss and volatility you are willing and able to accept. It depends on your finances, goals and emotional comfort.
Related terms
Your time horizon is how long you expect to hold an investment before you need the money. Longer horizons generally allow for more risk because there is time to recover from downturns.
Asset AllocationAsset allocation is how you divide your portfolio among asset classes such as stocks, bonds and cash. It is one of the biggest drivers of both risk and long-term returns.
DrawdownA drawdown is the decline from a portfolio's or asset's peak value to a later low. Maximum drawdown shows the worst peak-to-trough drop over a period.
What is Risk Tolerance?
Risk tolerance is how much investment loss and volatility you are willing and able to accept. It depends on your finances, goals and emotional comfort.
Can you give an example of Risk Tolerance?
Someone who would panic at a 20% portfolio drop has lower risk tolerance than someone who would keep investing calmly.