Investing can be risky business, especially if you haven’t taken your own risk tolerance into account.
Risk tolerance and risk willingness are frequently identified as crucial factors in deciding what to invest in and determining your asset allocation percentages. Even two investors with identical financial situations may have drastically differing attitudes and experiences that demand two drastically different investment portfolios to accommodate for risk tolerance. Learn more below about risk capacity versus risk willingness and how you can begin determining your own risk tolerance.
Risk tolerance is comprised of two parts: risk capacity and risk willingness. Risk capacity stems primarily from why you invest and when you will need the money; in other words, what is your capacity for taking on investment risk. For example, an investor close to retirement may be relying on her IRA in a few years and should not expose herself to high volatility. On the other hand, a young investor’s IRA may have an additional 25 years to grow, and therefore has the capacity to stomach more risk along the way.