Risk tolerance is not a quiz result. It is the ability and willingness to keep a suitable plan when account values fall and the news feels urgent.
Capacity is different from comfort
A person may feel calm but still need the money soon, or feel nervous despite having decades to invest. Time horizon and cash needs set limits.
Diversification will not prevent losses
It can reduce dependence on one company or sector, but broad markets can still decline together.
Write the rules during calm periods
A target allocation and rebalancing range reduce the temptation to invent a new strategy after every market move.
Sources
- U.S. Securities and Exchange Commission, Diversification and Asset Allocation.