Risk Tolerance

Personal Finance

Risk tolerance is your psychological and financial capacity to accept losses in pursuit of higher returns. It has two components: the financial ability to absorb a loss (time horizon, savings cushion, income stability) and the emotional ability to stick with a strategy when markets fall. A 28-year-old with stable income and 30+ years to retirement can financially tolerate 70-90% equity allocation; whether they can emotionally tolerate watching their 401(k) drop 40% in a bear market is a different question. Risk tolerance questionnaires from brokerages are crude but useful starting points. The right portfolio is one you'll actually stick with through a downturn.