Risk Tolerance — How Much Volatility Can You Handle?
Risk tolerance is your ability and willingness to endure investment losses. It determines how you should allocate your portfolio.
Three Factors
Time horizon: More time = more risk you can take. 30 years to retirement? You can handle 80% stocks. 5 years? Stick to 40% stocks, 60% bonds.
Financial situation: Stable income, low debt, solid emergency fund = can take more risk. Unstable income or high debt = conservative approach.
Emotional tolerance: If a 30% portfolio drop would make you panic-sell, you need less stock exposure, regardless of your time horizon.
Portfolio Allocation by Risk Level
| Risk Level | Stocks | Bonds | Expected Return | Worst Year |
|---|---|---|---|---|
| Conservative | 30% | 70% | 5-6% | -10% |
| Moderate | 60% | 40% | 7-8% | -25% |
| Aggressive | 90% | 10% | 9-10% | -45% |
The right allocation is one you can stick with during a crash. A conservative portfolio you hold beats an aggressive one you panic-sell.