When it comes to managing money, one size does not fit all. Every individual has a unique relationship with risk, which plays a crucial role in financial decision-making. The term “risk tolerance” refers to how much uncertainty or potential financial loss you’re willing to accept in pursuit of your goals. Whether you’re saving for retirement, planning a major purchase, or investing for other short-term or long-term goals, understanding your comfort zone with risk is essential to making the right financial choices for you, and requires honesty.

What Is Risk Tolerance and Why Does it Matter?

Risk tolerance is simply how much uncertainty or possibility of loss you’re willing and able to handle when it comes to your investments or savings. It’s part practical—how much you can afford to lose—and part emotional—how anxious you feel when the market goes up and down.

Understanding your risk tolerance helps you make rational decisions instead of emotional ones when markets fluctuate. For example, if you have a high risk tolerance, market swings might not phase you, and you may even see them as opportunities for returns. But if you have a lower risk tolerance, you may feel better knowing your savings are safe, even if the returns are more modest. There’s nothing wrong with either approach; it’s about finding what fits you best. It’s okay to have a low risk tolerance if you ultimately decide that the peace of mind that you receive from less volatile investments is more valuable than the potential of greater returns. Because it is your financial goals you are working towards, it’s crucial to have your portfolio and financial decisions reflect the level of risk you are comfortable with. Think honestly about how you react when the news headlines create volatility. Do you feel comfortable staying the course, or do you feel inclined to take risk off the table? This gut reaction is an indicator of your risk tolerance.

How to Assess Your Risk Tolerance

Determining your risk tolerance involves evaluating a mix of emotional, financial, and practical factors. Here are three key areas to consider:

1. Time Horizon: The length of time you plan to keep your money invested plays a significant role. If you’re investing for retirement 30 years from now, you might have the opportunity to endure more market volatility compared to someone retiring in the next year.
2. Financial Situation: Your current income, savings, and financial obligations determine how much risk you can afford to take. If you have a secure emergency fund and minimal debt, you may be able to handle higher-risk investments. Conversely, if you do not have savings or liquidity, protecting your initial investment may be top of mind for you.
3. Personality: This is the emotional side of risk tolerance. Some people stay calm during market downturns, while others lose sleep over dips in portfolio value. Think about how you felt around April 8th when the news around Tariffs created volatility. Was your reaction to reduce risk, or did you feel comfortable riding through the ups and downs for the sake of your long-term outcome and potential growth? Understanding how much risk you’re emotionally prepared to handle is key to identifying your risk tolerance. You may even learn that when markets are volatile, you have a higher or lower risk tolerance than your portfolio reflects.

Aligning Your Strategy with Your Risk Tolerance

Once you’ve assessed your risk tolerance, it’s time to align your financial strategies accordingly. Here are a few actionable tips:

• Diversify Your Portfolio: If you’re looking to balance the level of risk you’re taking on, spread your investments across different asset classes. A mix of stocks, bonds, private market investments, and cash can help meet your comfort level. 
• Set Goals: Clarify your financial objectives and timeframes. This will help you determine how much risk you need to take and how much you can afford to take based on your goals.
• Regularly Reassess Your Risk Tolerance: Your circumstances may change over time and you may need to adjust your portfolio to fit your current risk tolerance. Revisit your risk tolerance periodically—especially after major life events like a career change, having kids, or retirement.

Understanding your risk tolerance is an invaluable step toward building a financial strategy that works for you. When you find the right balance between risk and reward, you set the stage for achieving your goals without unnecessary stress. Take the time to assess your comfort zone and make informed decisions that support both your financial health and peace of mind.