When assessing an investor’s risk tolerance, there are two key components. What is the investor’s willingness to take on risk and what is his or her’s ability to take on risk.

WILLINGNESS

As an investor, how do you feel about the tradeoff between risk and reward? Some investors are not phased by an inevitable downturn in the markets, while others will bail out at the first sign of trouble.

ABILITY

This is the investor’s capacity for risk from a financial point of view. An investor who depends on their investments for daily expenses would have less risk tolerance than someone for whom an investment loss is merely a short-term inconvenience.

To measure your willingness to take on risk click here.