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Glossary entry · Trade-offs
Risk tolerance
Definition
Your personal ability to live with portfolio fluctuations without making emotional decisions. Different from risk capacity (how much risk you can financially absorb). The honest test: would you sleep through a 40% drawdown? If not, your risk tolerance is lower than the math says it could be.
Example
Two investors of the same age and income can have wildly different risk tolerances based on temperament.
Related
Trade-offs
Risk
The chance that an investment loses value — and how much it could lose.
Read →Volatility
How wildly an investment's price moves up and down. High volatility = bigger swings.
Read →Diversification
Spreading money across many different things so no single one can sink you.
Read →Bull & bear market
Long stretches of rising prices (bull) or falling prices (bear). Both end, eventually.
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