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Risk Tolerance: What It Is and Why It’s Important
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Risk Tolerance: What It Is and Why It’s Important
Risk tolerance is how much of a loss you're prepared to handle within your portfolio. Your goals, investing timeline and comfort level all factor into the equation.
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Expertise Homebuying homeownership mortgagesBarbara Marquand is a former NerdWallet writer covering mortgages, homebuying and homeownership, insurance and investing. Previously, she covered personal finance for QuinStreet and wrote for national consumer and trade publications on topics including business, careers and parenting. Her work has appeared in MarketWatch, MSN Money, The New York Times and The Washington Post.
Barbara Marquand is a former NerdWallet writer covering mortgages, homebuying and homeownership, insurance and investing. Previously, she covered personal finance for QuinStreet and wrote for national consumer and trade publications on topics including business, careers and parenting. Her work has appeared in MarketWatch, MSN Money, The New York Times and The Washington Post. Published in Senior Writer + more + more
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Arielle O’Shea leads the investing and taxes team at NerdWallet. She has covered personal finance and investing for nearly 20 years, and was a senior writer and spokesperson at NerdWallet before becoming an editor. Previously, she was a researcher and reporter for leading personal finance journalist and author Jean Chatzky, a role that included developing financial education programs, interviewing subject matter experts and helping to produce television and radio segments. Arielle has appeared on the "Today" show, NBC News and ABC's "World News Tonight," and has been quoted in national publications including The New York Times, MarketWatch and Bloomberg News. She is based in Charlottesville, Virginia. Published in At NerdWallet, our content goes through a rigorous editorial review process. We have such confidence in our accurate and useful content that we let outside experts inspect our work. Head of Content, Investing & Taxes + more + more
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14 years of experience Expertise Small business finances investing bankingRobert Beaupre leads the SMB team at NerdWallet. He has covered financial topics as an editor for more than a decade. Before joining NerdWallet, he served as senior editorial manager of QuinStreet's insurance sites and managing editor of Insure.com. In addition, he served as an online media manager for the University of Nevada, Reno.
Robert Beaupre leads the SMB team at NerdWallet. He has covered financial topics as an editor for more than a decade. Before joining NerdWallet, he served as senior editorial manager of QuinStreet's insurance sites and managing editor of Insure.com. In addition, he served as an online media manager for the University of Nevada, Reno. Published in Head of Content, Small Business + more + moreRisk tolerance is the ability to withstand losses when your investments perform poorly. If you buy stocks, for instance, how much of a drop in the market can you stomach?
Risk tolerance is the ability to withstand losses when your investments perform poorly. If you buy stocks, for instance, how much of a drop in the market can you stomach?If your tolerance is low, you may want to invest conservatively. For instance, a greater portion of your portfolio might be in low-risk bonds and a smaller portion in higher-risk stocks.
If your tolerance is low, you may want to invest conservatively. For instance, a greater portion of your portfolio might be in low-risk bonds and a smaller portion in higher-risk stocks.Knowing your risk tolerance helps create a plan that can drive how you invest.
Knowing your risk tolerance helps create a plan that can drive how you invest.» MORE: How to choose a good financial advisor
» MORE: How to choose a good financial advisor » MORE: How to choose a good financial advisorRisk tolerance factors
Risk tolerance factors“Everyone’s risk tolerance is going to be different,” says Charlie Horonzy, a certified financial planner and founder of Focused Up Financial in Chicago.
“Everyone’s risk tolerance is going to be different,” says Charlie Horonzy, a certified financial planner and founder of Focused Up Financial in Chicago.Here are some of the determining factors:
Here are some of the determining factors:Goals: The purpose of financial planning isn’t to accumulate the biggest pile of money possible. It’s to decide what you want out of life, calculate how much money you need to reach those goals, and then choose an investment strategy that will deliver the appropriate returns.
Goals: Goals: The purpose of financial planning isn’t to accumulate the biggest pile of money possible. It’s to decide what you want out of life, calculate how much money you need to reach those goals, and then choose an investment strategy that will deliver the appropriate returns.Timeline: Generally you can take more risk if you have a lot of time to ride out the bumps. “If you’re going to need money in five or 10 years, that’s much different than if you have 15 years or more,” Horonzy says. The stock market’s overall trajectory across decades is upward, but there are dips and plateaus. A 30-year-old who’s saving to retire at 65 has plenty of time to wait those out. But if you’re saving to buy a house in a few years, investing that savings in stocks is too risky because there likely won’t be enough time to recoup losses if the stock market drops.
Timeline: Timeline: Generally you can take more risk if you have a lot of time to ride out the bumps. “If you’re going to need money in five or 10 years, that’s much different than if you have 15 years or more,” Horonzy says. The stock market’s overall trajectory across decades is upward, but there are dips and plateaus. A 30-year-old who’s saving to retire at 65 has plenty of time to wait those out. But if you’re saving to buy a house in a few years, investing that savings in stocks is too risky because there likely won’t be enough time to recoup losses if the stock market drops.» MORE: Learn how wealth management works
» MORE: Learn how wealth management works » MORE: Learn how wealth management worksAge and life stage: At 30, you’ve got time not only to ride out volatility but to make more money working. That's not the case at age 70 or 80.
Age and life stage Age and life stage : At 30, you’ve got time not only to ride out volatility but to make more money working. That's not the case at age 70 or 80.Portfolio size: Someone starting retirement with a $5 million portfolio may be able to take more risk than someone with $500,000. The person with the larger portfolio has more cushion if values drop.
Portfolio size: Portfolio size: Someone starting retirement with a $5 million portfolio may be able to take more risk than someone with $500,000. The person with the larger portfolio has more cushion if values drop.Personal comfort level: Some people are naturally more comfortable with taking risk than others. If market volatility is too stressful, that’s a signal that you may need to be in less-risky investments.
Personal comfort level: Personal comfort level: Some people are naturally more comfortable with taking risk than others. If market volatility is too stressful, that’s a signal that you may need to be in less-risky investments.The risks of ignoring risk tolerance
The risks of ignoring risk toleranceInvesting without considering risk tolerance is like sleepwalking to the edge of a cliff. Imagine investing in stocks without thinking about how you’ll react if their value drops.
Investing without considering risk tolerance is like sleepwalking to the edge of a cliff. Imagine investing in stocks without thinking about how you’ll react if their value drops.“You’re going to get woken up very fast when the market goes down,” Horonzy says.
“You’re going to get woken up very fast when the market goes down,” Horonzy says.A big danger then is freaking out and fleeing the market. Then “you’re falling into investing mistake No. 1 of selling low,” says Nora Yousif, a certified financial planner and senior vice president of RBC Wealth Management in Boston. A drop in the market is actually an opportunity to buy because prices are down.
A big danger then is freaking out and fleeing the market. Then “you’re falling into investing mistake No. 1 of selling low,” says Nora Yousif, a certified financial planner and senior vice president of RBC Wealth Management in Boston. A drop in the market is actually an opportunity to buy because prices are down.Another danger is playing it too safe, Yousif says. You don’t take enough risk to reach goals. Taking a slightly more aggressive position to get better returns can make a huge difference over the long haul.
Another danger is playing it too safe, Yousif says. You don’t take enough risk to reach goals. Taking a slightly more aggressive position to get better returns can make a huge difference over the long haul.» MORE: See our picks for the year's best financial advisors
» MORE: See our picks for the year's best financial advisors » MORE: See our picks for the year's best financial advisorsSee where you stand compared to households like yours, and get steps you could take to grow from here.
Run the numbersNWWP is an SEC-registered investment adviser. Registration does not imply skill or training. Calculator by NerdWallet, Inc., an affiliate, for informational purposes only.
NWWP is an SEC-registered investment adviser. Registration does not imply skill or training. Calculator by NerdWallet, Inc., an affiliate, for informational purposes only.Risk tolerance quiz
Risk tolerance quizFinancial advisors have clients fill out questionnaires to help gauge their risk tolerance. Answer questions about risk honestly — not as you think a smart investor would.
Financial advisors have clients fill out questionnaires to help gauge their risk tolerance. Answer questions about risk honestly — not as you think a smart investor would.Take our quick risk tolerance quiz to begin exploring your attitude about risk-taking. The quiz isn’t intended to guide investment choices — you’ll need to consider your goals, timeline and other factors before making investment decisions — but it can give you insight into your natural tendencies.
Take our quick risk tolerance quiz to begin exploring your attitude about risk-taking. The quiz isn’t intended to guide investment choices — you’ll need to consider your goals, timeline and other factors before making investment decisions — but it can give you insight into your natural tendencies. About the author Barbara Marquand Barbara Marquand Barbara Marquand is a former NerdWallet writer covering mortgages, homebuying and homeownership. See full bio.ON THIS PAGE
Risk tolerance factors Risk tolerance factors The risks of ignoring risk tolerance The risks of ignoring risk tolerance Risk tolerance quiz Risk tolerance quizON THIS PAGE
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