Christian Simmons, writer and researcher for RetireGuide
  • Written by
    Christian Simmons

    Christian Simmons

    Financial Writer

    Christian Simmons is a writer for RetireGuide and a member of the Association for Financial Counseling & Planning Education (AFCPE®). He covers Medicare and important retirement topics. Christian is a former winner of a Florida Society of News Editors journalism contest and has written professionally since 2016.

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    Lamia Chowdhury
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    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.

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  • Published: June 20, 2023
  • Updated: July 10, 2023
  • 6 min read time
  • This page features 1 Cited Research Article
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How to Cite's Article

APA Simmons, C. (2023, July 10). What Is Risk Tolerance? Why It Matters + Examples. Retrieved April 16, 2024, from

MLA Simmons, Christian. "What Is Risk Tolerance? Why It Matters + Examples.", 10 Jul 2023,

Chicago Simmons, Christian. "What Is Risk Tolerance? Why It Matters + Examples." Last modified July 10, 2023.

Risk tolerance is your willingness to lose some or all of your original investment in exchange for a potentially greater return in the future. In other words, it’s an investor’s comfort level during an unpredictable or volatile market.

A few factors influence an investor’s risk tolerance, such as their age, income and financial goals. There is no right or wrong risk tolerance — comfort levels are unique to each individual.

When investing, knowing how much risk you’re comfortable with is very important. Let’s explore the relationship between tolerance and risk and how you can assess which level you fall under.

Why Risk Tolerance Matters

Your risk tolerance plays a crucial role in strategizing your ideal asset allocation, allowing you to meet your financial goals without losing sleep from your choices. Many financial advisors and planners will use their client’s risk tolerance to tailor a financial plan specific to their needs and goals.

Why Risk Tolerance Matters

That said, “risk” can mean different things to different people. For example, one individual might interpret risk as losing everything, while another might view loss as part of the process. Whichever way you define it, finding a balance between risk and return can set up the right asset allocation and help you become a successful investor.

Risk Tolerance Levels

During a volatile market, will you sell or stay the course? Can you sleep soundly without worrying about your investments? How you respond in these situations and scenarios can give insight into your level of risk tolerance.

Check out the risk scale below for an idea of which level you may fall under.

Profiles of Different Risk Tolerance Levels


Some investors don’t not want to risk losing their money or need to live off their investments. They don’t like volatility and would rather avoid high-risk investments. Most conservative investors are in their later stages of life, such as nearing retirement. They’re not too concerned about becoming wealthy but rather funding their lifestyle.

With a conservative investing style, an example portfolio may consist of 40% bonds and 60% stocks or vice versa.


Moderate investors are willing to wait longer to reach their financial goals. They typically start investing at key points in their life, such as during their first stable job, marriage or after having children.

Many retirees fall within the moderately-conservative range, where they’ll want some exposure to higher-risk investments because they either haven’t saved enough money for retirement or have suffered losses over the years.

With a moderate investing style, your ideal portfolio may consist of 20% bonds and 80% stocks, or a 30% bonds and 70% stocks ratio.


Investors looking to match or beat market returns have a more aggressive investing approach. They’re most likely looking to save for retirement at an accelerated pace and are willing to take on the added risk.

Aggressive investors are typically in their 20s and 30s, so they haven’t suffered a significant loss of funds. At this stage in life, a longer time horizon can work in your favor against risk. This is because young investors have room to recover from losses long before retirement.

For example, someone aged 26 and at the height of their career would probably be more willing to lose his capital in exchange for potentially higher returns than a person aged 62 planning to retire soon. Someone closer to retirement would most likely prefer more predictable returns for minimal losses.

With an aggressive investing style, an example portfolio may have a ratio of 10% bonds and 90% stocks.

How To Assess Your Risk Tolerance

Now that you’re familiar with the different investing styles, it’s time to consider your risk tolerance. Here are five key factors to consider when determining your risk tolerance.

1. Income

What is your personal financial situation? For example, if you have a stable job with a consistent income, you may be okay with taking greater risks in your portfolio. However, if your income is inconsistent, such as a contract position or a self-owned business, taking a more moderate or conservative stance on your portfolio may make more sense.

2. Time Frame

Are you looking to retire soon or further down the line? Safe stocks—those with relatively stable returns over time, are generally a preference for investors nearing retirement.

3. Personal Obligation

Are you single with no dependents? If so, you can have more flexibility and freedom to take on greater risks. On the other hand, if you have a large family with people dependent on you financially, you may prefer more stable returns.

4. Financial Goals

When planning to build substantial wealth, you must be comfortable with risk. In this scenario, taking on greater risk could mean earning higher returns more quickly or losing a greater portion of your capital. However, if your goal is comfort, you’re probably fine with taking less risk.

5. Personal Tolerance Level

Think about your general tolerance level outside of money and investing. How do you approach risk in other aspects of your life? For example, are you strategic in planning out a vacation or up for more spontaneous adventures? Consider the level of the worst-case scenario you are comfortable with, and be realistic about how you’ll react.

A financial planner can guide you through these types of questionnaires to determine your level of risk tolerance, such as the one below:

Flow Chart for Determening Risk Tolerance Level

Frequently Asked Questions

What are high-risk investments?
High-risk investments offer higher returns and rewards than other investment products, but investors face a higher chance of losing substantial or all of their capital. For example, stocks are considered high-risk investments, with values that can widely fluctuate from market volatility.
What’s the difference between risk tolerance and risk capacity?
While risk tolerance focuses on your willingness and comfort levels with investment options, risk capacity is how much risk you can take on before possible losses threaten your investment goals. Risk capacity excludes emotions and depends on mathematical factors such as your time horizon and current earning power.
What is the 60/40 portfolio?
Referred to as the classic “retiree portfolio,” the 60/40 rule is where you have 60% of a 401(K) or IRA in stocks and the other 40% of your investments in bonds. This is a common retirement savings strategy designed to protect your funds during inflation or market volatility.
Apply Risk Tolerance to Your Retirement Planning
Using what you know about your risk tolerance levels when investing can set you up for success during retirement. Keep in mind that your risk tolerance can change over time. What you may be comfortable with now might not be so a few years from now or after a major life change. If you’re still unsure where you fall or you prefer professional insight, consult with a financial advisor. The right financial advisor can help you figure out the best retirement plan for both your tolerance level and financial goals.
Last Modified: July 10, 2023

1 Cited Research Article

  1. Underwood, K. (2022, July 19) Risk Tolerance and risk capacity go hand-in-hand when creating an investment strategy. Retrieved from: