What is Risk Tolerance?
Risk tolerance refers to how much risk you are willing to take. Typically, higher risk comes with the chance of much higher rewards, while lower risk options typically have less pay-off but are less volatile, and safer.
If you have quite a low-risk tolerance, perhaps because you are older and wouldn’t want to lose your money, then you might invest 90% of your money into less risky items, while leaving 10% for a few more risky options.
How would you react if you saw a large market drop? Could you ride it out? If you would lose sleep over your investments, then a less risky approach might be a better fit for you.
It’s all about finding the right blend of risk for your goals and comfort zone.