Risk tolerance measures how much risk you are willing to handle. How comfortable are you when your investment takes a hit while waiting for it to pick up or appreciate in value? If you’re close to retirement age, you most likely have a much lower risk tolerance than a 25 year old person at the start of his or her career. If you have a low risk tolerance, you’re risk averse and capital preservation is your priority. If you are an aggressive investor with a high tolerance, you’re willing to accept losing your capital in exchange for higher potential returns. However, jut because you have the stomach for a high-risk investment doesn’t mean you should. It is important to figure out how much financial ability or capacity you have to handle risk.
