What is the difference between risk tolerance and risk capacity?

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November 2016
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The Investopedia answer is spot on, providing an excellent definition and explanation to both of these concepts. I’d like to add a few personal thoughts about risk tolerance, especially in view of the fact that the stock market has been on an upward trend for the past 5 years. For most of us with money in mutual funds, ETFs, or other diversified investments, it’s been a pretty sweet half decade. When things are going good, it’s easy to begin to think of yourself as very risk tolerant. It’s so nice to glance at your statements and see green designating that you have more money than you had last month or last quarter. However, if you are old enough to remember 2008 and other historical periods when the stock market (and our mutual funds!) lost value, you may want to think about revising your outlook on risk. It doesn’t mean that you should necessarily sell your investments or stop investing, but you want to be aware of the risk each of your investments entails to make sure that you are knowledgeable about, and comfortable with, those risk levels. The question really comes down to the question of whether you can stomach losses – including possible loss of principal – in your quest for gains. As Investopedia’s Ayton MacEachern wisely writes, “taking the time to understand your personal risk situation may require self-discovery on your part, along with some financial planning.”  Thanks so much for writing!

November 2016
November 2016
November 2016
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