Measures an investor’s comfort level for investment price fluctuation.

Demonstrates the connection between greater risk and greater potential reward.

Understanding risk tolerance is critical to maintaining a long-term investment plan.

Risk tolerance measures an investor’s ability to accept the natural price fluctuations of their investments. An investor’s risk tolerance is described as: conservative, moderate, or aggressive. These terms refer to the individual’s investment style and their ability to comfortably tolerate investment fluctuations.

Conservative investors are focused on principle stability and less on growth. Moderate investors are willing to balance some risk for the opportunity for long-term growth.

Aggressive investors want maximum growth potential for their financial assets and understand that the potential for greater gain (reward) comes with the potential for greater investment loss (risk).

A critical component for successful investing is understanding risk tolerance. When investments are not selected properly to match risk tolerance, investors tend to panic at market bottoms and to become exuberant at market tops. They are also more likely to abandon their investment plan.