Determining Your Financial Risk Tolerance

Congratulations on taking this first step to understand yourself better, and determine your financial risk tolerance.

Risk tolerance pertains to an individual's capacity to emotionally and psychologically embrace, acknowledge, and manage the unpredictability and fluctuations linked with taking risks. It focuses on an individual's outlook and ease with risk, rather than their financial ability to withstand losses.

 You should not confuse risk tolerance with risk capacity.

Financial risk capacity refers to an individual's or entity's ability to withstand potential financial losses without experiencing significant negative consequences. It considers factors such as financial resources, income stability, liquidity, and time horizon for financial goals.

Now to the process of assessing your risk tolerance...

 When the topic of "financial risk" arises, what emotions surface for you? Do you perceive it as a gateway to lucrative opportunities? Do thoughts of the excitement of investing come to mind? Or do worries about potential losses dominate your thoughts, leading to fears of financial instability? Do you view risk as an integral aspect of the investment journey?

To gain insight into your risk tolerance, consider questions like these and reflect on your behavioral patterns—such as your response to significant investment setbacks or your decision-making during market downturns.

Being candid with yourself about these inquiries and aligning your investment risk accordingly could aid in constructing a portfolio that you're comfortable with, even during periods of market volatility.