What is My Risk Tolerance?
Understanding your comfort level with investment risk
Understanding Risk Tolerance
Risk tolerance is your ability and willingness to handle investment losses in pursuit of potential returns. It's a crucial factor in building an investment strategy that you can stick with during market fluctuations.
Risk Tolerance vs Risk Capacity
Risk Tolerance (Emotional)
How comfortable you feel with investment volatility and potential losses
Risk Capacity (Financial)
Your actual ability to withstand losses based on your financial situation
Factors That Influence Risk Tolerance
Personal Factors
- Age
Younger investors typically have longer time horizons and higher risk tolerance
- Income Stability
Secure, predictable income supports higher risk tolerance
- Financial Knowledge
Understanding markets and investments increases comfort with risk
- Past Experiences
Previous investment outcomes shape your risk perception
Financial Factors
- Net Worth
Higher net worth generally supports greater risk capacity
- Emergency Fund
Having cash reserves reduces investment risk pressure
- Debt Level
Lower debt obligations increase risk capacity
- Dependents
Financial responsibilities affect risk tolerance
Risk Tolerance Levels
Risk Averse
Prioritizes capital preservation over growth. Comfortable with minimal volatility and lower returns.
Balanced
Balanced approach between growth and stability. Accepts moderate volatility for better returns.
Adventurous
In it for the long term. Prioritizes maximum growth over stability. Comfortable with high volatility for potential high returns.
Risk Assessment Questions
1. Market Reaction
If your portfolio dropped 25% in a market downturn, what would you do?
A. Sell everything to stop further losses
B. Sell some investments, keep some
C. Hold and wait for recovery
D. Buy more while prices are low
2. Investment Goals
What's your primary investment objective?
A. Preserve capital, minimal risk
B. Generate regular income
C. Balanced growth and income
D. Maximum long-term growth
3. Time Horizon
When do you plan to use this money?
A. Less than 3 years
B. 3-5 years
C. 5-10 years
D. More than 10 years
Common Risk Tolerance Mistakes
Overestimating Risk Tolerance
Many people think they're comfortable with risk until they actually experience losses.
Ignoring Risk Capacity
Taking more risk than your financial situation can support.
Not Reassessing Regularly
Risk tolerance changes with age, income, and life circumstances.
Following the Crowd
Investing based on others' risk tolerance rather than your own.
Matching Risk Tolerance to Investments
Risk Averse
Government bonds, high-quality corporate bonds, savings accounts, money market funds
Expected return: 2-4% annually
Risk level: Low
Balanced
Balanced funds, mix of bonds and equities.
Expected return: 5-8% annually
Risk level: Medium
Adventurous
Global markets, over the past 50 odd years have averaged 10% each year.
Expected return: 8-15%+ annually
Risk level: High
When to Reassess Risk Tolerance
Life Events
- • Marriage or divorce
- • Having children
- • Job change or promotion
- • Inheritance or windfall
- • Retirement approaching
Market Events
- • Significant market corrections
- • Major life goal achieved
- • Investment strategy change
- • Every 3-5 years normally
- • When comfort level changes
Ready to Assess Your Risk Tolerance?
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