Leo Zwiener — Market Insights

Within investing, the term risk tolerance is constantly used; however, its meaning is often misunderstood and thrown around too easily. At its core, risk tolerance is your ability and willingness to handle fluctuations (price changes) in the value of your investments. A very easy way to describe it is: how comfortable are you if your assets go down in value?

Some assets, like stocks, tend to rise and fall more dramatically. Others, such as bonds, are more stable but typically offer lower returns. The trade-off is very straightforward: higher potential returns usually come with higher short-term uncertainty. The same goes vice versa; if you prefer low risk, the ROI (return on investment) will also likely be lower. Risk tolerance is about how you respond to uncertainty.

A real-world example of this is: if you invest $1,000 in Apple stock and it drops to $700 within a few weeks, a loss of 30%, what do you do next? If your instinct is to sell to avoid further losses, that suggests a lower risk tolerance. If you’re able to stay invested and focus on long-term growth over the short-term chop, your risk tolerance is likely higher.

Age plays a very big & important role here. As a 17-year-old, I have a long investment horizon, which gives my portfolio time to recover when my equities fall. I have a longer time horizon for my equities to grow before I need to sell them. From a purely financial perspective, that often supports taking on more risk due to my low age. However, it’s not as easy as it sounds. Psychological comfort matters just as much, if not more than, the time horizon.

An effective investment strategy is a consistent one.

Even a well-designed and thought-out portfolio can fail if it leads to emotional decisions during market declines. Selling in response to short-term losses is one of the most common ways investors sabotage their own returns. Understanding your risk tolerance means being truly honest with yourself about your reactions, not just your goals. Before investing, it’s worth taking a risk tolerance test online or asking yourself if I lost 50% of this money, how would I react, and letting that help decide where to put your money. Ultimately, risk tolerance is not just a financial concept; it’s a personal one and a necessary one.