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John J. Hardy
Global Head of Macro Strategy
Saxo Group
Investing is not only about picking stocks or bonds—it’s also about finding a strategy that matches your financial goals and comfort level with risk. Some people embrace risk, seeing it as an opportunity for higher returns, while others prefer stability, avoiding market fluctuations as much as possible. This is where risk tolerance comes into play.
Risk tolerance is defined as the willingness and ability to take risks when investing. It determines the types of investments best suited for you and helps build a portfolio that aligns with your comfort level. Understanding your own risk tolerance is crucial because investing in assets that don’t match it can lead to stress, panic selling, or missed opportunities for growth.
In this article, we’ll explore what influences risk tolerance, the different types of investors, and how you can determine the best approach for yourself.
Everyone has a different level of risk tolerance, and it’s shaped by a combination of factors, including personality, financial situation, and investment time horizon.
Some people are naturally drawn to high-risk activities, whether it’s driving fast, skydiving, or making bold career moves. Others prefer a more cautious approach, choosing stability and predictability. This same attitude can carry over into investing.
Your risk tolerance is also influenced by emotional resilience. Some investors can stay calm during market downturns, while others panic when they see their portfolio drop in value. Understanding your reaction to financial uncertainty can help guide your investment choices.
Your financial stability plays a major role in how much risk you can afford to take.
For example, consider two investors: one with a portfolio worth €5 million and another with €100,000. If both lose 50% of their investments, the impact will be much greater on the second investor, making risk tolerance highly dependent on personal financial circumstances.
Your investment time horizon—the amount of time before you need to withdraw money—also affects your risk tolerance.
The longer your investment timeframe, the more risk you can generally take, because time allows the market to recover from temporary declines.
Based on risk tolerance, investors typically fall into three categories: conservative, balanced, and aggressive. Each type has different investment strategies and ideal asset allocations.
A conservative investor values safety and stability over high returns. Their primary goal is to protect capital and avoid large market fluctuations.
A conservative investor's portfolio will typically have a higher percentage of bonds and cash, with only a small portion in stocks.
A balanced investor is comfortable with some risk but still values stability. They want a mix of growth and protection in their portfolio.
A balanced investor’s portfolio typically has a mix of stocks and bonds, allowing them to benefit from stock market growth while still maintaining some stability.
An aggressive investor seeks maximum growth potential and understands that large short-term market swings are part of the process.
For aggressive investors, the focus is primarily on stocks and alternative investments, with a smaller portion in bonds or cash.
If you’re unsure where you fall on the risk tolerance spectrum, ask yourself the following questions:
A) Panic and sell immediately (Conservative)
B) Feel concerned but stay invested (Balanced)
C) See it as an opportunity to invest more (Aggressive)
A) Less than 5 years (Conservative)
B) 5–15 years (Balanced)
C) More than 15 years (Aggressive)
A) Stability: I want to avoid losses (Conservative)
B) A balance: I want growth but with some protection (Balanced)
C) Growth: I can handle risk for higher returns (Aggressive)
Your answers will give you a better idea of where you fall on the risk spectrum. However, risk tolerance isn’t static—it can change based on life events, financial goals, and market conditions. And if your risk tolerance changes, simply rebalance your portfolio.
Understanding your risk tolerance is essential for making smart investment decisions. The key to successful investing isn’t about taking the most risk possible—it’s about finding the right level of risk for you.
If you’re a conservative investor, focus on stability and preserving wealth. If you’re balanced, aim for a mix of growth and safety. If you’re aggressive, embrace higher-risk, higher-reward investments.
Before you start investing, take the time to assess your financial situation, goals, and comfort with risk. This will help you choose the right investment strategy and build a portfolio that aligns with your needs.