What is Risk Tolerance? Plus How to Determine Your Level

Investing your money in the stock market can be an important step to building long-term wealth and financial stability. But many people avoid investing because they worry about market changes. In fact, a 2023 study from Allianz Life found that 64% of Americans said they would rather have their money sit in cash than endure market fluctuations. 

But that can be a costly mistake. If you don’t participate in the stock market, you could miss out on the power of compounding and market growth.

(Try our compound interest calculator to see for yourself!)

The key to investing and weathering market changes is understanding your risk tolerance. Risk tolerance — the level of risk you’re comfortable with when you invest — affects your investment decisions and options.

What is risk tolerance?

When you invest money in the stock market, there’s no guarantee you’ll make money. 

Historically, the stock market has provided average annual returns of about 10%, but not all investments perform well, and even the best investments can experience declines. Investing always involves a level of risk, so your risk tolerance is how much risk you’re willing to accept when you put your money into the market. 

Your risk tolerance affects the types of investments you might consider, as well as how much money you put into these different types. There are three main categories of investments that you should know about:

• Equities: Equities, also known as stocks, are shares of companies. Stocks tend to be the riskiest investment, but they also have the potential for higher returns. 

• Fixed-income: A fixed-income security, such as a government or corporate bond, typically provides regular interest payments and repays the principal. They provide a higher return than you’d get from a savings account but are less risky than stocks. 

• Cash and equivalents: Cash and its equivalents are short-term, low-risk investments, such as treasury bills. They provide low returns, but they also have the smallest amount of risk. 

Three types of risk tolerance

Depending on your goals and overall financial situation, your risk tolerance may fall into one of the following categories:

Conservative risk tolerance

If your risk tolerance is conservative, your goal is typically to preserve your money and protect it against market volatility. Your investments will likely be in lower-risk asset classes, such as fixed-income or cash equivalents. A conservative investment portfolio won’t typically fluctuate very much if the market declines, but they might have lower returns as a tradeoff. This level of risk tolerance is often recommended for short-term financial goals, or money you expect to need on hand soon. 

Moderate risk tolerance

With a moderate risk tolerance, you tend to take on some risk for the potential of higher returns. Your portfolio is typically balanced between riskier investments in equities and more conservative options like bonds or money market funds. 

Aggressive risk tolerance

For those with an aggressive risk tolerance, higher risk investments such as stocks usually make up the majority of your portfolio — or maybe even 100% of your portfolio. An aggressive investor, or someone with a high risk tolerance, is typically comfortable with major price fluctuations so they can potentially benefit from higher returns later. This level of risk tolerance is often better suited for long-term financial goals, or money you are comfortable experiencing large fluctuations over a long time horizon. 

How to determine your level of risk tolerance

Before you can begin investing your money, you have to figure out how comfortable you are with investment risk. Your risk tolerance may vary across different financial goals, and each investor often accepts a different degree of risk across what they are investing for. You can determine your risk tolerance by considering the following factors: 

Age

How old you are can affect how much risk you can handle. If you’re young — maybe you're in your 20s or 30s — you have time for the market to recover after downturns, and you might feel comfortable taking on more risk for long term goals such as retirement. By contrast, someone in their 60s and nearing retirement age typically can't afford much risk, so they might want to consider a more conservative portfolio. 

Time to achieve the goal

Similarly, think about the time horizon for your goals. If you’re investing to build a retirement nest egg and have decades before you plan to retire, you can usually choose riskier investments. But if you have a short-term goal, such as buying a home within the next few years, you likely don't want to take on the risk of your portfolio declining in value significantly in the event of a market downturn. If this is the case, you may want to consider a more conservative approach. 

Portfolio size

The size of your portfolio — and how much extra money you have to invest — also affects your risk tolerance. If you have a large portfolio and a substantial amount of assets, you’re likely more comfortable with risk. But if you have a smaller portfolio and not a lot of extra cash, a lower-risk investment strategy may make you more comfortable. 

Your comfort level

No one likes to lose money. But some people handle market changes more patiently than others and can wait it out until the market recovers. Everyone is different, so think about how you’d feel if the value of your portfolio dropped overnight. 

You can use this free risk tolerance assessment tool by the University of Missouri to help assess your general risk tolerance. 

5 tips for managing risk

Market swings can be anxiety-inducing. But these tips can help you make sound financial decisions and get through market changes: 

Be honest about your risk tolerance

When creating an investment account, be upfront about your comfort level with risk. The risk an investor is willing to accept affects their portfolio, so it can have a big impact on how your money is invested.  

Diversify your portfolio

When you’re investing in higher-risk assets such as stocks, diversification can be key. Rather than investing in a few companies, you can reduce your risk by investing in many across different industries. Exchange-traded funds (ETFs) and index funds are excellent ways to diversify your portfolio without having to spend a lot of time managing it. 

Be consistent

When the market declines, it can be tempting to stop contributing or even withdraw money. But that can cost you over the long run. Instead, consider making regular contributions to your investment accounts if you can. Through dollar-cost-averaging, you can level out pricing fluctuations and reduce the amount of risk your portfolio has to weather. 

Focus on long-term goals

Rather than checking in your portfolio value daily or weekly, think about the long term. While the market can fluctuate, historically, the stock market has recovered and delivered returns over time. 

Avoid trends and hot stocks

It can be easy to get caught up in buzz about the hottest new company or trends in certain industries. But before you start buying stocks, think about how your investment fits into your overall portfolio.  

Acorns ETF Portfolios

When you first start investing with Acorns, you will be asked questions about your current financial situation, money goals, and how long you plan on investing for. Along with your answers, Acorns will take into account factors like your age, income, and risk tolerance to recommend an ETF (exchange-traded fund) investment portfolio best suited for you and your long-term goals.

By investing with Acorns, you’re investing in an ETF portfolio. That means rather than buying shares of individual stocks, you’re investing in a bunch of different investments at the same time. In fact, depending on your risk tolerance and the ETF, you could get exposure to over 7,000 stocks and bonds with a single ETF. 

Through ETFs, you can invest in major companies, but you also get built-in diversification. 

Acorns’ expert-built portfolios are managed by professionals with top investment firms, such as Vanguard and BlackRock. 

It doesn’t take a lot of money to get started. You can open an Acorns Invest account with as little as $5, and you can even use our Round-Ups® feature to invest with just your spare change.