Investors need to know their risk tolerance vs. their risk capacity - Business Insider

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Risk tolerance is a measure of how much risk you can withstand emotionally, while risk capacity is how much risk you can handle financially. Presented by Fidelity MasterYourMoney

— or even a robo-advisor, for that matter — about investing money, then you've probably heard of "risk tolerance" or taken a risk-tolerance questionnaire.

and bonds. But many investors put far too much emphasis on their emotional reactions, rather than asking, "what is my actual capacity for risk?"the risks that a risk-tolerance questionnaire might suggest you can take. Capacity and tolerance are not the same things. Because when we're talking about investments, "realizing" risk means losing your money. Your tolerance doesn't mean much if it exceeds your capacity.This is why speculative investments or highly-concentrated positions are usually a bad idea for most people — even if your risk tolerance says you can handle high-risk options.

 

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