Risk Tolerance

Risk tolerance refers to an investor’s willingness to lose principal in exchange for potentially greater return. Intrinsically, risk tolerance is subjective. Thus, it varies according to a number of factors—like age, affluence, and sophistication.  For example, the younger, wealthier, and savvier the investor, the higher is their tolerance for risk. As such, an aggressive investor with high risk tolerance may prefer small-company stocks, emerging market equities, and gold. By contrast, a conservative investor with low risk tolerance might opt for money-market funds, certificates of deposit, and Treasuries.