Risk tolerance is the amount of portfolio decline you can endure without panicking into selling at the bottom. It is a mix of your time horizon, your financial situation, and your temperament.
A quick test: if your portfolio fell 30% tomorrow, would you buy, hold, or sell? Your honest answer tells you more than any questionnaire about the equity allocation you can actually maintain.
The goal is to set an allocation you can hold through a full cycle. The best portfolio is not the one with the highest expected return, it is the one you will not abandon when it gets uncomfortable.
Key takeaways
- Risk tolerance is about behavior, not just numbers
- Imagine a 30% drawdown to test your real tolerance
- Allocate so you can stay invested through the cycle
