Risk Tolerance

AAA

DEFINITION of 'Risk Tolerance'

The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important component in investing. An individual should have a realistic understanding of his or her ability and willingness to stomach large swings in the value of his or her investments. Investors who take on too much risk may panic and sell at the wrong time.

INVESTOPEDIA EXPLAINS 'Risk Tolerance'

Investors can assess their degree of risk tolerance by taking one of a number of different risk tolerance questionnaires. In addition, it can be useful to review worst-case returns for different asset classes historically in order to get an idea of how much money one would feel comfortable losing if his or her investments have a bad year or bad series of years.
Other factors affecting risk tolerance are the time horizon that one has to invest, future earning capacity, and the presence of other assets such as a home, pension, social security or inheritance. In general, one can take greater risk with investable assets when there are other, more stable sources of funds available.

RELATED TERMS
  1. Risk Seeking

    The search for greater volatility and uncertainty in investments ...
  2. Portfolio

    A grouping of financial assets such as stocks, bonds and cash ...
  3. Asset Allocation

    An investment strategy that aims to balance risk and reward by ...
  4. Investing Style

    In the context of stock mutual fund investing, refers to using ...
  5. Rebalancing

    The process of realigning the weightings of one's portfolio of ...
  6. Investment Objective

    A client information form used by registered investment advisors ...
RELATED FAQS
  1. How do I use the Vortex Indicator (VI) to create a forex trading strategy?

    The vortex indicator is composed of two oscillators: a downtrend oscillator (VI-) and an uptrend oscillator (VI+). It is ... Read Full Answer >>
  2. What percentage of a diversified portfolio should be invested in the financial services ...

    The percentage of a diversified portfolio that should be invested in the financial services sector depends on the investor's ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Achieving Optimal Asset Allocation

    Minimizing risk while maximizing return is any investor's prime goal. The right mix of securities is the key to achieving your optimal asset allocation.
  2. Investing Basics

    Determining Risk And The Risk Pyramid

    Many investors do not understand how to determine the risk level their individual portfolios should bear.
  3. Options & Futures

    Risk Tolerance Only Tells Half The Story

    Just because you're willing to accept a risk, doesn't mean you always should.
  4. Investing Basics

    Get Personal With Your Portfolio

    Use personal experiences and milestones to help determine your stock picks and investments.
  5. Options & Futures

    5 Common Mistakes Young Investors Make

    Starting to invest can be a scary process. Luckily, steering clear of common errors is half the battle.
  6. Active Trading Fundamentals

    Measuring And Managing Investment Risk

    Risk is inseparable from return. Learn more about these measures and how to balance them.
  7. Active Trading

    Why Investments That "Feel" Safe May Not Be

    Investors tend to be adventurous in situations where they feel protected, but risk compensation theory suggests this may backfire.
  8. Options & Futures

    What Is Your Risk Tolerance?

    Forget the cliches and uncover how much volatility you can really stand.
  9. Investing Basics

    Redefining Investor Risk

    Changing the way you think about time and risk can change the way you invest.
  10. Retirement

    The Leverage Cliff: Watch Your Step

    Understanding your risk tolerance level can save you a lot of grief and financial instability in the future.

You May Also Like

Hot Definitions
  1. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  2. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  3. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  4. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  5. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  6. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
Trading Center