Risk tolerance

Risk tolerance is how much volatility and potential loss an investor is personally willing and able to accept in exchange for the possibility of higher returns. It depends on both financial factors, like time horizon and income stability, and psychological factors, like how someone actually reacts when their portfolio drops.

Risk tolerance is different from risk management, which is what an investor actually does to control risk. Risk tolerance is more about self-knowledge, understanding your own limits before a downturn happens rather than discovering them for the first time in the middle of one.