Risk tolerance
How much uncertainty and loss an investor can accept, both financially and emotionally, in pursuit of higher expected returns.
Also called: risk appetite · risk profile
Risk tolerance has two parts that are often confused. Risk capacity is financial: how large a fall your plans can absorb without harm, which depends on your income, savings, time horizon and what the money is for. Risk willingness is psychological: how you actually feel and behave when your portfolio drops. Advisers and investment platforms usually assess it with questionnaires about how you would react to hypothetical losses, and use the answers to suggest an asset allocation.
The honest test of risk tolerance is not a questionnaire in a calm market but what you do in a real downturn. Many investors overstate their tolerance after a run of good years and discover its true level when they sell near the bottom, turning a temporary fall into a permanent loss. It is better to choose a mix you can hold through a serious fall than a more aggressive one you abandon halfway. Risk tolerance can change with age, circumstances and experience, so it is worth revisiting.
General education, not personal financial, tax or legal advice.