You might feel fine about risk and still be unable to afford it.
Direct answer
Risk tolerance is how comfortable you feel with investment losses. Risk capacity is how much loss you could afford financially. A secure income, a long time horizon and a large emergency fund raise capacity. When the two differ, choose investments that fit the lower one.
Factors that affect capacity
- Income stability
- Time horizon
- Emergency fund size
- Debts and dependants
- How soon you need the money
A quick example
Someone who feels fearless about risk but has no emergency fund and big debts has low capacity. Someone with plenty of savings who panics at small losses has low tolerance.
Where Teyro fits
Teyro's How to Understand Investment Risk course turns this into short lessons you can play in a few minutes a day. It has 50 lessons, and you can start free.
The bottom line
Respect both. This is general education, not advice.
This is general education, not personal financial advice.
