According to Charles Schwab, risk tolerance is the level of risk an investor is willing to take. But being able to accurately gauge your appetite for risk can be tricky. Risk can mean opportunity, excitement, or a shot at big gains—a “you have to be in it to win it” mindset. But risk is also about tolerating the potential for losses, the ability to withstand market swings and the inability to predict what’s ahead.
In fact, behavioral scientists say “loss aversion”—essentially, that the fear of loss can play a bigger role in decision-making than the anticipation of gains—can color your approach to risk. Since risk tolerance is determined by your comfort level with uncertainty, you may not become aware of your appetite for risk until faced with a potential loss.
Learn how to determine your risk tolerance level here.