The Difference Between Risk Tolerance and Risk Appetite

Know Your Tolerance for Risk vs. Your Appetite for Risk

  • Risk – The exposure to an impairment of standard of living and irretrievable loss of wealth.

  • Risk Appetite – The amount and type of risk you’re willing to accept in pursuit of your objectives. – A higher risk appetite means a willingness to endure temporary declines in the value of your portfolio in order to gain greater wealth in the long-run.

  • Risk Target – The optimal level of risk you want to take in pursuit of a specific goal. – For your portfolio this means the amount of exposure to stocks. Conservative portfolios have the least exposure to stocks and therefore have the least risk. Exposure to stocks adds volatility to the portfolio.

  • Risk Tolerance – The specific maximum risk you are willing to take. The amount of decline you could withstand before you panic and move to cash.

  • Risk Capacity – The amount and type of risk you are able to support in pursuit of your goals.

Understanding risk and reward is critical to making decisions on how to invest your money to reach your financial goals. Identifying your overall risk tolerance is key to investing in the appropriate portfolio in order to be able to withstand the volatility inherent in the market and to keep you on track to meet your financial goals.

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