What is the difference between risk tolerance and risk capacity?

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Your ability to tolerate risk, personally, is your risk tolerance. For example, would you be okay with extreme volatility in your portfolio, if it was for the sake of greater long-term returns? Some people would agree with this statement; their risk tolerance is relatively great. However others might disagree, and say they would prefer stability, even if it meant lower returns; their risk tolerance is relatively low. 

Risk capacity is a function of your actual ability to take risk. Someone who is several decades away from retirement has a greater risk capacity than someone who is only a couple of years from retirement. Someone who has a high net worth has a greater risk capacity than someone with very limited funds. Risk capacity has to do with the amount of risk you can afford to take; would a 20% market downturn affect you dramatically? Or do you have enough funds that you could survive such a dip? Or, do you have enough time to recover from such a dip, before you'll need to access the funds?

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