In financial planning, risk tolerance refers to the amount of variation in investment returns that an investor is prepared to accept. When it comes to investing, risk tolerance is crucial. You should be realistic about your capacity and desire to withstand significant fluctuations in the value of your assets; if you take on too much risk, you may panic and sell at the wrong moment.
Age is frequently linked to risk tolerance, although it is not the only deciding factor. People who are younger and have a longer time horizon, on the other hand, are typically able to and encouraged to take on greater risk than those who are older and have a shorter time horizon.
Equities, equity funds, and ETFs are frequently linked with higher risk tolerance, whereas bonds, bond funds, and ETFs are frequently associated with lower risk tolerance. However, age should not be used to determine whether or not to transfer asset classes. Those who have a larger net worth and disposable income can usually afford to take more risks with their assets.
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Risk tolerance is a measure of how much of a loss an investor is willing to endure within their portfolio.
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It looks at how much market risk—stock volatility, stock market swings, economic or political events, regulatory, or interest rate changes—an investor can tolerate, considering that all of these factors might cause their portfolio to slide.
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A person’s age, investment goals, income, and comfort level all play into determining their risk tolerance.
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An aggressive investor, or someone with higher risk tolerance, is willing to risk more money for the possibility of better returns than a conservative investor, who has lower tolerance.
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A person with moderate risk tolerance sits in the balance between an aggressive and conservative investor.