Before you invest a single dollar, there’s one crucial question you need to answer: What’s your risk tolerance? Simply put, risk tolerance is your ability to handle the ups and downs of the stock market without panicking. It’s your emotional and financial capacity for taking on risk — and it’s different for everyone. Knowing your risk tolerance can help you make smarter investment choices that you’ll stick with. 

In this blog, we’ll explain how to determine your risk tolerance, why it matters, and how to apply it to your investment strategy. 

What Is Risk Tolerance? 

Risk tolerance is the amount of uncertainty or loss you’re willing (and able) to accept as an investor. Some people can confidently ride out stock market drops, while others feel stressed at the first sign of a dip. Your risk tolerance depends on factors like: 

  • Time Horizon – How soon you’ll need the money you’re investing. The longer your timeline, the more risk you can generally take. 
  • Financial Situation – If you have emergency savings and stable income, you will likely handle market fluctuations. 
  • Personality & Emotions – Are you naturally a "go with the flow" person, or are you anxious when things are uncertain? Your temperament plays a role. 

Why Risk Tolerance Matters

Imagine putting your savings into an investment and then watching it drop 20% in a month. Would you: 
A) Feel calm and think, "This is normal; I’m in it for the long term." 
B) Panic, sell everything, and vow never to invest again 

If you answered B, you’re not alone. But this is precisely why risk tolerance matters. If your investment strategy doesn’t match your risk tolerance, you’re more likely to make emotional decisions (like selling in a panic) that could hurt you financially. Understanding your risk tolerance allows you to create an investment plan that works for you. 

How to Measure Your Risk Tolerance 

Not sure how to figure out your risk tolerance? Here are three ways to measure it. 

1. Take a Risk Tolerance Quiz 
Financial advisors, investment apps, and brokerage platforms offer risk tolerance quizzes that assess your comfort level with risk. These quizzes ask questions like: 

  • How would you feel if your portfolio dropped 20% in a month? 
  • How long do you plan to keep this money invested? 
  • If you had to choose, would you prefer a "guaranteed" 4% return or a "possible" 10% return with risk? 

Where to Take One:

  • Forbes Advisor Investment Risk Tolerance Quiz: The Forbes Advisor's Investment Risk Tolerance Quiz helps individuals assess their comfort level with investment risks, guiding them to make informed financial decisions based on their personal risk tolerance  

2. Assess Your Time Horizon 
The longer you plan to stay invested, the more risk you can typically handle. If you’re saving for something 30 years from now (like retirement), you can ride out market ups and downs. But if you’re saving for a goal just two years away (like a house down payment), you’ll want to take less risk. 

How to Do It:

  • Write down your big financial goals (retirement, home purchase, travel, etc.). 
  • Note the year you plan to reach each goal. 
  • If your goal is more than 10 years away, you can probably take more risk. If it’s less than 3-5 years away, stick to low-risk investments like savings accounts or CDs. 

Pro Tip: Your risk tolerance can change over time. When you’re 25, you might be comfortable taking significant risks with retirement money, but when you’re 55, your tolerance might shift toward stability and security. 

3. Reflect on Your Emotional Response to Risk 
Think back to moments when you faced uncertainty or potential loss. How did you react? Your gut reaction says a lot about your natural risk tolerance. 

Questions to Ask Yourself:

  • How do I feel when my bank account balance drops lower than usual? 
  • If I buy something expensive (like a phone or laptop), do I get buyer’s remorse? 
  • When I’ve made financial mistakes in the past, did I react calmly or with anxiety? 

If you’re naturally risk-averse, you may want to avoid high-volatility investments. If you’re more risk-tolerant, you may be comfortable with stocks, ETFs, and other market-based investments. 

How to Apply Your Risk Tolerance to Your Investments 

Once you know your risk tolerance, you can use it to create an investment strategy that fits you. Here’s how: 

  • High-Risk Tolerance – Consider stocks, ETFs, and long-term growth investments. The payoff is higher, but so is the volatility. 
  • Medium Risk Tolerance – Diversify with a mix of stocks and bonds. This "balanced portfolio" reduces big swings in value while still providing growth. 
  • Low-Risk Tolerance – Focus on low-risk options like savings accounts, CDs, or conservative bond funds. These options prioritize safety and stability. 

Pro Tip: Your "risk capacity" (how much risk you can afford to take) is different from "risk tolerance" (how much risk you’re emotionally okay with). A financial planner can help you balance both. 

Key Takeaways 

  • Risk tolerance is your personal comfort level with financial uncertainty. 
  • Your tolerance depends on your time horizon, finances, and personality. 
  • You can measure it using risk quizzes, reflecting on your emotions, and assessing your time horizon. 
  • Once you know your risk tolerance, you can choose investments that match your comfort level. 

Reflection Questions

  1. How would you describe your personal risk tolerance — high, medium, or low? Why? 
  2. Have you ever experienced financial loss? How did you react, and what did you learn from it?
  3. If you’re saving for retirement or a big goal, how might your time horizon affect your investment choices? 

Knowing your risk tolerance is a game-changer for smart investing. You’ll make more confident choices, avoid emotional mistakes, and stay on track toward your financial goals. So, take a moment to figure out where you stand. Are you ready to ride the wave or would you prefer smoother seas? No answer is wrong — it’s about what’s right for you.