Introduction to Investing: A Beginner's Guide to Asset Classes
The first step is learning to distinguish different types of investments and what rung each occupies on the risk ladder.
tolerance for risk
Many veteran investors diversify their portfolios using the asset classes listed above, with the mix reflecting their <anchor>tolerance for risk</anchor>. A good piece of advice to investors is to start with simple investments, then incrementally expand their portfolios. Specifically, mutual funds or ETFs are a good first step, before moving on to individual stocks, real estate, and other alternative investments.
What Is Risk Tolerance, and Why Does It Matter?
What Is Risk Tolerance, and Why Does It Matter?

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Table of Contents

Expand

Table of Contents

- [What Is Risk Tolerance?](#toc-what-is-risk-tolerance)

- [Understanding Risk Tolerance](#toc-understanding-risk-tolerance)

- [Aggressive Risk Tolerance](#toc-aggressive-risk-tolerance)

- [Moderate Risk Tolerance](#toc-moderate-risk-tolerance)

- [Conservative Risk Tolerance](#toc-conservative-risk-tolerance)

- [Risk Tolerance FAQs](#toc-what-is-an-example-of-a-6040-portfolio-structure)


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# What Is Risk Tolerance, and Why Does It Matter?

By

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Alexandra Twin has 15+ years of experience as an editor and writer, covering financial news for public and private companies.

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Updated July 07, 2022

Reviewed by

[Marguerita Cheng](https://www.investopedia.com/marguerita-cheng-4684136)

Reviewed byMarguerita Cheng

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![Risk Tolerance: The degree of risk that an investor is willing to endure.](https://www.investopedia.com/thmb/1BLp6ysEQ-SH-WXYNh9J6eQRRSw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Risktolerance_sketch_final-0619a850eb10420ab1a9afd44b2abbb8.png)

Investopedia / Michela Buttignol

## What Is Risk Tolerance?

Risk tolerance is the degree of risk that an investor is willing to endure given the [volatility](https://www.investopedia.com/terms/v/volatility.asp) in the value of an investment. An important component in [investing](https://www.investopedia.com/terms/i/investing.asp), risk tolerance often determines the type and amount of investments that an individual chooses.

Greater risk tolerance is often synonymous with investment in stocks, equity funds, and [exchange-traded funds](https://www.investopedia.com/terms/e/etf.asp) (ETFs), while lower risk tolerance is often associated with the purchase of bonds, bond funds, and [income funds](https://www.investopedia.com/terms/i/incomefund.asp).

### Key Takeaways

- Risk tolerance is a measure of the degree of loss an investor is willing to endure within their portfolio.
- Stock volatility, market swings, economic or political events, and regulatory, or interest rate changes affect an investor's tolerance for risk.
- Age, investment goals, and income contribute to an investor's risk tolerance.
- An aggressive investor commonly has a higher risk tolerance and is willing to risk more money for the possibility of better, yet unknown, returns.
- A conservative investor commonly has a lower risk tolerance and seeks investments with guaranteed returns.

## Understanding Risk Tolerance

All investments involve some degree of risk and knowing their risk tolerance level helps investors plan their entire [portfolio](https://www.investopedia.com/terms/p/portfolio.asp), determining how they invest. Based on how much risk they can tolerate, investors are classified as aggressive, moderate, and conservative.

Risk tolerance assessments are available online, including risk-related surveys or questionnaires. An investor may also want to review historical returns for different [asset classes](https://www.investopedia.com/terms/a/assetclasses.asp) to determine the volatility of the various financial instruments.

One factor that affects risk tolerance includes the time horizon for an investor. Having a financial goal with a long time horizon, an investor may have greater returns by carefully investing in higher-risk assets, such as stocks. Conversely, lower-risk cash investments may be appropriate for short-term financial goals.

An investor's future earning capacity, and the presence of other assets such as a home, pension, [Social Security](https://www.investopedia.com/terms/s/socialsecurity.asp), or an inheritance affect risk tolerance. An investor can take greater risk with investable assets when they have other, more stable sources of funds available. Additionally, investors with a larger portfolio may be more tolerant to risk, as the percentage of loss is much less in a larger portfolio when compared to a smaller portfolio.

### Tip

Order your copy of Investopedia's [What To Do With $10,000 magazine](https://www.amazon.com/dp/1547862912/ref=sr_1_7?keywords=investopedia&qid=1684168403&sr=8-7) for more wealth-building advice.

## Aggressive Risk Tolerance

An [aggressive investor](https://www.investopedia.com/terms/a/aggressiveinvestmentstrategy.asp), or one with a high-risk tolerance, is willing to risk losing money to get potentially better results. Aggressive investors tend to be market-savvy with an understanding of the volatility of securities and follow strategies for achieving higher than average returns.

Their investments emphasize [capital appreciation](https://www.investopedia.com/terms/c/capitalappreciation.asp) rather than income or preserving their principal investment. This investor's asset allocation commonly includes stocks and little or no allocation to bonds or cash.

## Moderate Risk Tolerance

Moderate investors want to grow their money without losing too much. Their goal is to weigh opportunities and risks and this investor's approach is sometimes described as a “balanced” strategy.

Commonly, moderate investors develop a portfolio that includes a mixture of stocks and bonds, perhaps as a 50/50 or 60/40 structure.

## Conservative Risk Tolerance

Conservative investors are willing to accept little to no volatility in their investment portfolios. Retirees or those close to [retirement age](https://www.investopedia.com/terms/r/retirement.asp#:~:text=Key%20Takeaways&text=In%20the%20U.S.%2C%20the%20full,can%20collect%20Social%20Security%20benefits%29.) are often included in this category as they may be unwilling to risk a loss to their principal investment and have a short-term investment strategy.

A conservative investor targets vehicles that are guaranteed and highly liquid. Risk-averse individuals commonly opt for bank [certificates of deposit](https://www.investopedia.com/terms/c/certificateofdeposit.asp#:~:text=A%20certificate%20of%20deposit%20%28CD%29%20is%20a%20product%20offered%20by,a%20predetermined%20period%20of%20time.) (CDs), money markets, or U.S. Treasuries for income and preservation of capital.

## What Is an Example of a 60/40 Portfolio Structure?

A moderate risk-tolerant investor may choose to invest in a 60/40 structure which may include a 60% investment in stocks, 30% in bonds, and 10% in cash.

## What Financial Instruments are Considered High Risk Investments?

[High-risk investments](https://www.investopedia.com/articles/markets/121515/8-high-risk-investments-could-double-your-money.asp) include investing in [options](https://www.investopedia.com/terms/o/option.asp), [initial public offerings](https://www.investopedia.com/terms/i/ipo.asp) (IPO), and [foreign emerging markets](https://www.investopedia.com/emerging-markets-4689751).

## How Does Risk Tolerance Compare to Risk Capacity?

While risk tolerance measures an investor's willingness to take risk, an investor's [risk capacity](https://www.investopedia.com/articles/financial-advisors/071415/how-evaluate-your-clients-capacity-risk.asp) measures their financial ability to take a risk.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our
[editorial policy.](https://www.investopedia.com/legal-4768893#EditorialPolicy)

1. U.S. Securities and Exchange Commission. " [Assessing Your Risk Tolerance](https://www.investor.gov/introduction-investing/getting-started/assessing-your-risk-tolerance)."

2. Charles Schwab. " [How to Determine Your Risk Tolerance Level](https://intelligent.schwab.com/article/determine-your-risk-tolerance-level)."


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