Risk Tolerance and Investment Returns

1. Risk Tolerance is the degree of variability in investment returns that an investor is willing to withstand in their financial planning. 

2. Risk tolerance is an important component in investing. You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments; if you take on too much risk, you might panic and sell at the wrong time.

3. Risk tolerance is often associated with age, although that is not the only determining factor. However, in a general sense, people who are younger and have a longer time horizon are often able to and are encouraged to take on greater risk than people older with a shorter-term horizon. 

4. Greater risk tolerance is often synonymous with equities and equity funds and ETFs, while lower risk tolerance is often associated with bonds, bond funds, and ETFs. But age itself shouldn't determine a switch in asset classes. Those with a higher net worth and more disposable income can also typically afford to take greater risks with their investments.

5. An aggressive investor, or someone with higher risk tolerance, is willing to risk more money for the possibility of better returns than a conservative investor, who has lower tolerance.

6. An investor with moderate risk tolerance sits in the balance between an aggressive and conservative investor.

Written by Dr. Chao Yuang Shiang (趙永祥 博士)

Faculty, Dep. of Finance, Nanhua university