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All investing comes with some degree of risk—it's just the nature of the beast. The question comes down to how much investment risk you're willing to accept. When calculating your risk tolerance, you'll consider your personality, age, financial goals and other factors.
Whether you're conservative with your money or comfortable with higher stakes, understanding your risk tolerance can help you build an investment portfolio that's tailored to you.
What Is Risk Tolerance?
Your risk tolerance refers to the amount of investment risk you're comfortable taking. It's an important thing to consider since market volatility is unavoidable, especially if you're investing over the long term. The stock market naturally fluctuates, and stock prices respond by moving up and down. These movements can be triggered by the following:
- Changes in the economy
- Global crises like war, geopolitical conflicts and worldwide economic issues
- Political changes
- Disruptions within certain industries
- Positive or negative earnings reports
- Leadership changes within specific companies
When the stock market is up, you might earn capital gains if you sell an investment for more than you paid for it. But the opposite is also true: Your portfolio can lose value if stock prices decline—or you sell assets at a loss.
Your risk tolerance describes how much investment risk you can actually stomach. Some investors might be comfortable putting money into high-risk investments like hedge funds, private equity or real estate. Others might be more risk averse.
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Types of Risk Tolerance
Where you fall on the risk tolerance spectrum will be unique to you and your investment goals. It's also something that can evolve over time. Here's a closer look at what that might look like.
| Aggressive Risk Tolerance | Medium Risk Tolerance | Low Risk Tolerance | |
|---|---|---|---|
| Primary goal | Netting the strongest returns possible | Balancing growth and stability | Protecting wealth by opting for modest returns |
| Investment style | Favors more volatile investments | Favors a mix of high- and low-risk investments | Favors safe, predictable assets |
| Potential returns and losses | Highest | Moderate | Low |
| Time horizon | Long | Medium | Short |
| Generally best for | Younger investors who have time to recover from periods of market volatility | Investors who are looking for a middle ground and have a medium to long investment timeline | Investors with a shorter time horizon, including those who are approaching retirement or already retired |
Aggressive Risk Tolerance
Those with an aggressive risk tolerance may direct more of their investment dollars toward volatile assets. That can include:
- Individual stocks
- Cryptocurrency
- Initial public offerings (IPOs)
- Private equity
- Hedge funds
- Real estate
- Non-fungible tokens (NFTs)
High-risk investments can result in higher returns or significant losses. The tricky thing is that it's virtually impossible to predict how the market will behave. Bitcoin is a great example. The value of this popular cryptocurrency hit an all-time high of $126,280 in October 2025, then plummeted to $60,000 two months later.
Medium Risk Tolerance
Investors with a medium risk tolerance generally prefer a mix of high- and low-risk assets. This is what diversification is all about. If you experience losses in one part of your portfolio, gains in other areas could help even things out.
The 60/40 portfolio is generally geared toward these investors. This asset allocation, which involves holding 60% stocks and 40% bonds, can strike a balance between growth and stability. An analysis by LPL Financial found that from 2000 to 2025, the average 10-year annualized rolling return of a 60/40 portfolio was 7.8%.
Low Risk Tolerance
If you have a low risk tolerance, you may gravitate toward safer, more predictable assets. That generally includes:
- Bonds
- Certificates of deposit (CDs)
- Money market accounts
- High-yield savings accounts
- Annuities
- Cash value life insurance
- U.S. Treasury securities
But maintaining some exposure to the stock market is usually a wise move, even if you're a low-risk investor. Otherwise, you may struggle to grow your portfolio in a meaningful way. It can also be harder to keep up with inflation if the bulk of your money is in low-return investments. Saving for retirement often involves some level of stock investing.
How to Determine Your Risk Tolerance
Clarifying your risk tolerance can help you land on the right investment strategy for you. A financial advisor may be a helpful resource, but you can also begin by asking yourself the following questions.
How Many Years Do You Have Until Retirement?
Your investment timeline is an important factor. If you're younger, and have more time to bounce back from market dips, you may feel comfortable assuming more risk in your portfolio. But retirees, and those who are approaching retirement, may not want all their money tied up in volatile investments.
This is the idea behind target-date funds. These age-based investment accounts automatically rebalance as you get closer to retirement. This way, your asset allocation will become gradually more conservative over time.
What Are You Investing For?
Again, your investing timeline can directly influence your risk tolerance. Your investment goals may include:
If you're working toward a short-term financial goal, you might opt for low-risk investments to minimize potential losses—and maintain easy access to your money. That may include a CD, high-yield savings account or money market account. But if you have a longer time horizon, high-risk investments may feel like a better fit. For example, some experts recommend an asset allocation of 90% to 100% stocks for younger investors.
How Do You Feel About Risk?
This has to do with your personality and how you navigate uncertainty. Do you feel comfortable assuming more risk if the trade-off is higher potential returns? Or do you prefer a smoother ride and more modest gains? Only you can answer these questions.
The average annual stock market return has historically been around 10%, but highs and lows are to be expected—and returns are never guaranteed. The general rule is to stay invested, even during periods of volatility. Pulling your investments during market lows may require you to sell assets at a loss. You might also miss out on future returns when the market recovers.
Do You Have an Emergency Fund in Place?
Your emergency fund can provide a safety net if you experience a financial setback, whether that's losing a job or receiving an unexpected bill. The rule of thumb is to set aside three to six months' worth of expenses in a high-yield savings account. If you're still building your cash savings, you might prefer low-risk investments to shield yourself from potential losses. You can always assume more risk once your emergency fund is going strong.
Have You Invested Before?
Seasoned investors may feel less skittish about risk, especially if they've invested in a brokerage account and have a basic understanding of how it works. The same may be true for those who've contributed to a 401(k) or IRA. But if you're new to investing, you might feel more comfortable with low-risk investments while you learn the lay of the land. Those who've previously lost money with high-risk investments might also lean toward safer assets.
Why It's Important to Determine Your Risk Tolerance
Understanding your risk tolerance can help you create a financial portfolio that feels right for you and is aligned with your age, goals and timeline. That can prevent you from making trades based on your emotions—and allow you to build an asset allocation that actually supports your long-term vision.
Remember that your risk tolerance may change over time as you become a more confident investor. You might also opt for more or less risk as you move through different phases of your financial life, such as when you near retirement.
Frequently Asked Questions
When Do You Typically Have the Highest Investment Risk Tolerance?
Younger investors typically have the highest appetite for risk because they have the most time to recover from bouts of market volatility. If things get rough and their portfolio loses money, they can stay invested and potentially net higher returns when the market recalibrates.
When Do You Typically Have the Lowest Investment Risk Tolerance?
Older investors, including retirees, generally have a lower capacity for risk. When you're relying on your portfolio to generate regular income, it can be harder to tolerate short-term losses—and you may not have time to wait for a market recovery.
What's the Difference Between Risk Tolerance and Risk Appetite?
These terms are often used interchangeably. Risk tolerance refers to how much investment risk you can reasonably accept. Your risk appetite is more about the level of risk you naturally crave. If you're someone who doesn't like uncertainty and prefers to play it safe with your money, your risk tolerance and risk appetite are probably on the low side.
The Bottom Line
Your financial situation and goals will likely determine your risk tolerance. Some investors are comfortable putting money into volatile assets, while others prefer a more conservative approach. Many are somewhere in the middle. There isn't one right or wrong asset allocation. The end game is to create a portfolio that aligns with wherever you are on your financial journey.