What Is Risk Tolerance and Why Does It Matter for My Portfolio?

What do you do? Are you the type to feel panicked and think about selling, or do you shrug your shoulders and trust your portfolio can weather the dips? How you respond can clue you in on your risk tolerance. In fancy finance terms, that’s just a way to describe how comfortable you are with market variability. 

Personal comfort with risk, like we just described, is just part of the picture. Your risk tolerance can be influenced by other factors, too (don’t worry, we’ll go over them). Wherever you fall on the risk tolerance scale, it’s helpful to know where you stand. Ahead, we’ll go over how you can figure out your risk tolerance and why doing so can help you put together a portfolio mix that speaks to your money goals (and that you can feel good about). 

What is risk tolerance?

Risk tolerance essentially boils down to how much potential loss you’re prepared to handle with an investment. Now, you may be thinking, “well, that’s easy – I don’t want to lose anything!” And of course, we’re all hoping for as little downside as possible when we invest.