What Is Risk Tolerance?

Risk tolerance determines how much risk you can stomach. It’s often described as the degree of variability (ups and downs) in investment returns that you’re willing to withstand.

Risk tolerance, explained

Your risk tolerance is a measure which takes into account aspects of your financial situation such as your age, objectives and personal attitudes.

Typically, advisors suggest that younger investors can handle a larger proportion of risky investments, such as stocks. Strategies such as value investing may work well for younger age groups.

Alternatively, older investors should look toward more stable but less fruitful investments, such as bonds. Income investing is one of the better strategies if you’re risk-averse, as it focuses on generating a stable, but potentially reduced, income.

Investors who have a bigger tolerance for risk are usually more aggressive. Meanwhile, investors who have a lower risk tolerance tend to be more conservative. Some investors—moderate ones—fall somewhere in between.

What this means for you 

Before you invest, you’ll want to answer a few questions about your personal situation. These will help you determine the best strategy to suit your needs and risk tolerance.

For example, you should consider the following factors:

  • Age
  • Level of investing experience
  • Investment time horizon
  • Personal investment goals
  • Liquid assets

Based on your answers, you may tailor your investing strategy accordingly.

For instance, if you’re planning to start a family and buy a house soon, you may want a short-term strategy with larger gains. On the other hand, if you don’t want children soon, you may look toward a longer-term strategy that allows for slower gains but increased profits overall.

When you invest with apps like Q.ai,  you’ll answer a quick quiz to help you unpack your risk tolerance. You’ll be asked questions about all of the aforementioned factors to help you better identify your appetite for risk and select smarter strategies for your goals.

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