Whatever type of investment you are considering, it all boils down to one thing: risk and reward. This is where risk tolerance comes into play - in essence, the amount of risk you're willing to take to achieve your investment goals. In this article, we will consider different types of risk tolerance and how they can change over the years. As with anything related to investment markets, nothing stays the same forever!


What is risk tolerance?


You will often hear the terms risk tolerance, capacity, and risk required in the same sentence. As we touched on above, risk tolerance is the level of risk you can tolerate; risk capacity is your financial boundary, and risk required relates to the risk/reward ratio required for your investment targets.


If we look at risk tolerance, there are numerous factors to consider, such as:-


· Personal financial situation

· Time horizon

· Investment knowledge and experience

· Emotional comfort with risk


So far, this all looks pretty straightforward, but now it's time to dig deeper into the topic of risk tolerance.


Different types of risk tolerance


In a similar fashion to investing for retirement, there are three main categories of risk tolerance:-


Aggressive risk tolerance


An aggressive appetite for risk is often associated with traders focused on growth investments. However, it's important to recognise that an aggressive risk tolerance does not indicate a foolhardy investor; it just indicates someone appreciative of enhanced risk for enhanced rewards.


Moderate risk tolerance


When it comes to retirement planning, many investors switch to a moderate risk tolerance, which tends to involve some degree of investing for growth and stability.


Conservative risk tolerance


This approach is taken by someone who is averse to significant risk, whether they are approaching retirement, in retirement, or just taking a long-term conservative approach. Maintaining capital is more important than taking risks for aggressive growth in this situation.


Assessing your risk tolerance


Once you read the term risk tolerance, it will no doubt start you thinking about your personal approach to risk. One of the main problems is how you compare and contrast this with the wider investment community or maybe your previous attitude to risk.


There are many ways in which you can monitor and evaluate your own risk tolerance, such as:-


· Online self-assessment questionnaires

· Consultations with your financial advisor

· Using online risk tolerance tools


Only when you question why you have a specific risk tolerance can you appreciate where you stand in the wider picture. What you may have seen as a relatively high-risk tolerance may be more moderate or conservative on a broader scale. You might be surprised!


There are also numerous questions you can ask yourself now and in the future, such as:-


How would you react to a significant market downturn?

What are your financial goals and timelines?

How much loss can you afford to take on your investments?

When did you last review your approach to risk tolerance?

Do your historic returns justify the level of risk you took?


Once you start to think a little deeper, challenge your thoughts and approach to risk tolerance, it’s easier to identify where you are on the spectrum.


Psychological aspects of risk tolerance


Whether you are looking at a long-term investment, trading opportunities, or simply following the herd, it's essential to keep your risk tolerance in perspective. We talk about different types of risk tolerance as if they are clearly defined and controlled when that's not really the case. Several common psychological biases will affect your attitude to risk tolerance, such as overconfidence, loss aversion, and the security felt when you follow the herd.


While there is nothing wrong with having a degree of confidence, an aversion to losses, or a strategy that involves following the latest trends, it's important that your approach reflects your risk tolerance.




As mentioned above, it's essential to appreciate that even those with a high risk tolerance are not necessarily "casino gamblers". They don't place all of their chips on red or black; they have a higher tolerance for risk in exchange for potentially higher rewards. Unfortunately, this higher risk could occasionally lead to significant losses or even a financial wipe-out.


Can you clearly define your risk tolerance and whether this aligns with your current investment strategy?

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