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. Diversification

    A risk management technique that mixes a wide variety of investments ...
  3. Portfolio

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

    An investment strategy that aims to balance risk and reward by ...
  5. Rebalancing

    The process of realigning the weightings of one's portfolio of ...
  6. Risk Averse

    A description of an investor who, when faced with two investments ...
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.
RELATED FAQS
  1. What percentage of a diversified portfolio should be invested in the telecommunications ...

    While ideal portfolio structure varies wildly based on factors such as investing style and risk tolerance, the average investor ... Read Full Answer >>
  2. How is portfolio variance reduced in Modern Portfolio Theory?

    According to modern portfolio theory, or MPT, portfolio variance can be reduced by diversifying a portfolio through the inclusion ... Read Full Answer >>
  3. Is it better to buy A-shares or a no-load mutual fund?

    Mutual funds and other pooled investments are popular among investors because they provide a level of diversity and professional ... Read Full Answer >>
  4. How can I use risk return tradeoff to determine my risk tolerance and investment ...

    An investor can use the risk-return tradeoff to determine what type of assets to include in a portfolio. The risk-return ... Read Full Answer >>
  5. Why is risk return tradeoff important in designing a portfolio?

    The risk-return tradeoff determines how aggressive an investor wants to be with the assets included in the portfolio. An ... Read Full Answer >>
  6. How does the strength of the IPO market affect the drugs sector?

    The strength in the IPO market is an important indicator of liquidity, risk appetite and innovation in the drugs sector. ... Read Full Answer >>
  7. What is a good annual return for a mutual fund?

    A "good" annual return on a mutual fund can only be gauged in a relative sense, influenced primarily by the investment goals ... Read Full Answer >>
  8. Is there a positive correlation between risk and return?

    There is a positive correlation between risk and return with one important caveat. There is no guarantee that taking greater ... Read Full Answer >>
  9. How do I set a strike price for an option?

    The strike price of an option is the price at which the contract can be exercised. The strike price of a stock and an index ... Read Full Answer >>
  10. How do I find out my own risk tolerance?

    Risk tolerance is an individual measurement of the amount of risk you can safely assume for your portfolio. It varies considerably ... Read Full Answer >>
  11. 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 >>
  12. 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 >>

You May Also Like

Hot Definitions
  1. Nanny Tax

    A federal tax that must be paid by people who hire household help (a babysitter, maid, gardener, etc.) and pay them a total ...
  2. Dog And Pony Show

    A colloquial term that generally refers to a presentation or seminar to market new products or services to potential buyers.
  3. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  4. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  5. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  6. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!