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Risk Tolerance

Definition: How much fluctuation you can live with without abandoning your plan.

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Risk tolerance is how much variation in the value of your money you can live with — emotionally and financially — without abandoning your plan.

It has two halves that people often confuse. Capacity is objective: how long until you need the money, and whether a loss would force a change in your life. Willingness is emotional: whether a 30% fall would make you sell. A plan has to respect the lower of the two, because the best allocation on paper is worthless if you exit it at the bottom.