How to Determine Your Risk Tolerance
What Is Risk Tolerance — And Why Does It Matter?
At NEST, we use a lot of financial terms in our articles and updates, and while we aim to keep things clear, sometimes a buzzword can go undefined for too long. So today, we’re breaking down a term you’ll hear often in investing circles: risk tolerance.
We all know that investing involves risk. But that doesn’t mean it’s chaotic or equivalent to gambling. In fact, investing is strategic — with tools, data, and frameworks that allow us to understand and manage uncertainty. The goal isn’t to avoid risk altogether; it’s to take on the right amount of risk for your specific goals and circumstances.
That’s where risk tolerance comes in.
Understanding Risk in Investments
Risk tolerance starts with knowing the risks associated with different types of investments.
General (Systemic) Risk
This refers to broad risks that impact the entire market — like political instability, global pandemics, or inflation. For example, in 2020, widespread lockdowns led to market-wide price drops, affecting virtually every sector.
Specific Risk
Also called unsystemic risk, this includes:
Business risk – tied to internal issues like leadership or product viability.
Financial risk – linked to a company’s debt load versus its earnings.
The mix of debt and equity a business holds directly affects the risk level of investing in that company.
Interest Rate Risk
We’ve discussed this in our coverage on rate hikes, but in short: rising interest rates can slow consumer and business spending, which ripples across the entire market. This is especially relevant in today’s economy.
Your Personal Risk Profile
Knowing how risky an investment is isn’t enough. You also need to understand how much risk you can afford to take — financially and psychologically.
Here’s what shapes your personal risk tolerance:
Timeline
Long-term investors typically have more flexibility to recover from short-term losses. If your goal is 20 years away (say, retirement), you can afford more volatility than someone who needs access to funds in the next 12 months.
Risk Capital
This refers to the amount of money you can invest without significantly affecting your lifestyle. High-net-worth individuals often have more risk capital and can afford to pursue higher-risk investments without jeopardizing essential expenses.
Life Events and Phase
Your tolerance may shift over time — for example, after having a child, changing careers, or entering retirement. Each stage brings new priorities that affect how much risk you're comfortable taking on.
Investment Goals
Your desired outcome should match your risk profile. If you're looking to generate reliable income in retirement, your strategy will differ from someone aiming for aggressive growth over the next five years.
Personality and Philosophy
Some investors are naturally more risk-averse than others. That’s normal — and something to factor in. Even if your financial situation allows for more risk, you need to be able to sleep at night with your investment choices.
Experience
Newer investors often take a more conservative approach until they build confidence. Following the principle of capital preservation — prioritizing not losing your initial investment — is often a smart first step.
Finding the Right Balance
The best investment strategy sits at the intersection of:
The risk inherent in the investment
Your financial situation and goals
Your personal tolerance and experience
A well-informed, data-driven strategy
Regularly reassessing these factors as your life and the market evolve is essential.
Need Help Evaluating Your Risk Tolerance?
If this all feels overwhelming, you’re not alone. At NEST Financial, we’ve worked with families and individuals across Austin to help them assess their risk profiles, clarify their goals, and choose smart, custom investment strategies.
From understanding how commodities diversify a portfolio, to guiding clients through rate changes or debt ceiling debates, we’re here to provide grounded, experienced advice — not hype.
Email us directly at info@nestfinancial.net
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DISCLAIMER: The information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, contact info@nestfinancial.net.