Start with the definition

Risk tolerance is your ability to endure market volatility. It affects your choice of investments and the overall portfolio mix.

If you’re unsure where you land, don’t guess. Use three factors that actually map to real-life decisions.

1) Personality: can you stay invested when it gets rough?

It can feel easy to tolerate risk when markets are rising. The real test is how you’ll feel if the market turns down and your investment is leading the drop. Investing at a level of volatility you’re comfortable with can help you avoid emotional decisions.

Practical self-check: If your portfolio dropped 20% in a short period, would you sell, hold, or buy more? Your instinct matters because behavior impacts outcomes.

2) Time horizon: when do you need the money?

The sooner you may need your investment dollars, the lower your risk tolerance tends to be. A down payment in 2 years is different from retirement in 20 years. Longer time horizons may allow you to ride out downturns—though time alone is no guarantee of higher returns.

Practical move: Bucket goals by time (near-, mid-, long-term). Then align the investment approach to each bucket’s timeline.

3) Capacity for risk: what can you afford to lose?

Capacity is about your financial position—assets, income, and expenses. In general, the more resources you have to fall back on, the higher your risk tolerance may be.

Practical move: If losing X% would change your lifestyle, timeline, or sleep, that’s information—not weakness.

Where risk questionnaires help (and where they don’t)

Risk tolerance tests can generate a score and translate that into a general risk profile, but your plan should be tailored to your unique circumstances.

Disclosure: This is general information only, not investment advice. All investing involves risk, including the potential loss of principal, and there is no guarantee that any investment strategy will be successful.