Investment risk tolerance refers to an investor’s ability and willingness to endure market volatility and potential loss of capital when making investment decisions. It is influenced by various factors including financial situation, investment goals, time horizon, and psychological comfort with risk.

Understanding your risk tolerance is crucial because it helps you build a portfolio that aligns with your comfort level, financial goals, and time horizon. It can prevent you from making impulsive decisions during market downturns and helps ensure that you remain committed to your long-term investment strategy.

You can assess your risk tolerance by considering your investment goals, time horizon, financial situation, and emotional response to market fluctuations. Online risk tolerance questionnaires and consulting with a financial advisor can also provide insights into your risk tolerance.

Investments can be categorized by their risk levels:

• Conservative: Government bonds, high-quality corporate bonds, and money market funds.
• Moderate: Balanced mutual funds, dividend-paying stocks, and diversified portfolios.
• Aggressive: Individual stocks, real estate, and commodities.

Choosing the right mix of these investments helps align a portfolio with your risk tolerance.

It is advisable to reassess your risk tolerance at least annually or whenever you experience significant life changes such as marriage, childbirth, job change, or nearing retirement. Regular reassessment ensures that your investment strategy remains aligned with your evolving financial situation and goals.

Yes, diversification can help manage risk by spreading investments across various asset classes, industries, and geographic regions. This reduces the impact of any single investment’s poor performance on the overall portfolio, thereby mitigating risk.

A financial advisor plays a critical role in managing investment risk by helping you understand your risk tolerance, creating a diversified portfolio, and providing advice during market fluctuations. They can also assist in regularly reviewing and adjusting your investment strategy to align with your financial goals and risk tolerance.