Risk tolerance refers to the degree of variability in investment returns that an investor is willing and able to endure. It is determined by factors such as age, income, financial goals, investment timeline, and personal temperament.
Investors with high risk tolerance may favor stocks, cryptocurrencies, and other volatile assets that offer higher potential returns. Those with low risk tolerance typically prefer bonds, fixed deposits, and other stable investments that prioritize capital preservation.
For example, a young professional with decades until retirement may have high risk tolerance and invest aggressively in growth stocks. A retiree living on investment income would likely have low risk tolerance and favor stable, income-generating investments. Understanding your risk tolerance is essential for building a portfolio that matches your financial goals and comfort level.