Glossary
Risk Tolerance
Risk tolerance is the degree of investment loss and fluctuation a person can accept — financially and emotionally — without abandoning their plan.
It has two distinct components: capacity (how much loss the finances can objectively absorb, given time horizon and obligations) and willingness (how much decline the person can watch without selling). A plan is only as strong as the lower of the two.
Why it matters in practice
Most large, permanent investor losses are behavioral — selling near the bottom of a decline that would have recovered — and they happen when a portfolio's risk exceeds its owner's true tolerance. Tolerance stated in a bull market is routinely overstated; the honest test is dollars, not percentages ("this account falling from $400,000 to $280,000"). Matching the allocation to genuine tolerance in advance is cheaper than discovering the mismatch mid-crisis.
Related terms: Asset Allocation · Volatility · Drawdown · Time Horizon · Bear Market