Risk tolerance
Risk tolerance is the amount of decline an investor can hold through without abandoning their plan. It is a behavioural limit rather than a financial one, and it is routinely overestimated until it is tested.
There is a persistent gap between the loss people describe as acceptable on a questionnaire and the loss they actually sit through. Almost everyone rates their tolerance higher in a calm month than their behaviour supports in a bad one.
Capacity is a different question
Risk capacity is how much loss your circumstances can absorb — income, time horizon, obligations. Risk tolerance is how much you can watch without acting. They are frequently confused, and the binding constraint is whichever is lower. Someone with thirty years to retirement has high capacity and may still have low tolerance, and it is the tolerance that will decide what they actually do.
The only reliable evidence of your tolerance is what you did last time, which is an argument for keeping a record rather than a self-assessment.
Related terms
Maintained by Jared Sinclair, Founder · Syrax Global FZCO · Definitions are educational, not financial advice.
Knowing the vocabulary is the easy part.
Every term here can be learned in an afternoon. Applying them consistently under pressure is the part that decides outcomes — and the part almost nobody measures. That is what the series is about.