What is Risk Tolerance?

Neda Ali (Editor)

26th Apr'21

What is risk tolerance?

Risk tolerance is the degree of variability in investment returns that an investor is willing to withstand in their financial planning. Risk tolerance is an important component in investing. You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments; if you take on too much risk, you might panic and sell at the wrong time.

Risk tolerance is often associated with age, although that is not the only determining factor. However, in a general sense, people who are younger and have a longer time horizon are often able to and are encouraged to take on greater risk than people older with a shorter-term horizon. Greater risk tolerance is often synonymous with equities and equity funds and ETFs, while lower risk tolerance is often associated with bonds, bond funds, and ETFs. But age itself shouldn't determine a switch in asset classes. Those with a higher net worth and more disposable income can also typically afford to take greater risks with their investments.

Risk tolerance vs. Risk capacity

To know more read at below links:

Risk tolerance: what it is and why is it important?

Risk tolerance is how much of a loss you're prepared to handle within your portfolio. To know what is risk tolerance and why is it important, click here:

Risk tolerance

Risk tolerance refers to the amount of loss an investor is prepared to handle while making an investment decision. Several factors determine the level of risk an investor can afford to take. To know more, read here:

 

Risk tolerance vs. Risk capacity

Regardless of if you're a long-time investor, or just dabbling in the markets, evaluating your risk capacity and risk tolerance is critical for the health of your investments. Risk capacity and risk tolerance impact how you invest, what financial products you invest in, and help evaluate the time frames and expectations when it comes to achieving your investment goals.

In determining your financial goals it is essential to determine your risk capacity and risk tolerance, as well as understand the difference between the two. Both risk capacity and risk tolerance are essential to setting and achieving your financial goals, as they are an important factor in guiding what kinds of investments you should invest in. Evaluating risk is particularly critical during the growth stage of your retirement plan. 

Risk capacity

Read at below links to know the difference:

Difference between Risk Tolerance and Risk Capacity

Risk tolerance and risk capacity are two concepts that need to be understood clearly before making investment decisions. To know the difference, click here:

Difference between Risk tolerance vs. Risk Capacity

To know what is the difference between risk capacity and risk tolerance, read here:

 

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Contributor: Amrita Sinha

Amrita is in the field of media. She has a deep inclination towards writing and public speaking. She has the aim of removing the stereotypical mindset of society. She loves to read and photography is her passion.

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