Risk Tolerance
An investor's ability and willingness to endure declines in the value of their investments in pursuit of higher returns.
Example
An investor with high risk tolerance might hold 90% stocks in their 30s, accepting larger short-term swings for higher expected long-term growth; someone with lower risk tolerance at the same age might prefer 60% stocks and sleep better through a downturn.
Common Misconception
Risk tolerance isn't fixed — it's a mix of financial capacity (can you afford to lose money right now) and emotional temperament (can you avoid panic-selling during a drop), and both can change with age, income, and life events.
Why It Matters
A portfolio mismatched to your actual risk tolerance is the most common reason investors sell at the worst possible time — during a downturn, out of fear, locking in losses a better-matched allocation might have avoided.