Risk tolerance
Your personal ability — both financial and emotional — to handle losses in your investments without panic-selling.
Risk tolerance has two components. Financial capacity: can you afford a 30% drawdown given your timeline and obligations? A 25-year-old saving for retirement can — they have 40 years to recover. A 60-year-old retiring next year can't. Emotional tolerance: will you actually stay invested through a 30% drop, or will you sell at the bottom and lock in losses?
Most people overestimate their emotional tolerance until they live through a downturn. The 2008 financial crisis turned many "high risk tolerance" investors into "I'll never trust stocks again" investors at the worst possible moment.
Test your real tolerance by imagining specific scenarios. If your $100,000 portfolio dropped to $65,000 in nine months, what would you actually do? Sell? Buy more? Stop checking? Your honest answer should shape your asset allocation.
Cashowa's onboarding asks for a risk tolerance on a 1-10 scale — and uses it to bound how aggressive its plan suggestions get. The right number is the one you can live with through bad years, not the one that maximises returns in good years.
See also
- Asset allocation — How you split your investments across asset classes — typically stocks, bonds, and cash. The biggest driver of long-term returns and volatility.
- Diversification — Spreading your investments across many holdings so that no single one can sink your portfolio. The only free lunch in investing.
- Compound interest — Interest earned not just on your original deposit, but on the interest that's already been added to it. The engine of long-term wealth.
Ask Cashowa about risk tolerance
Apply this concept to your actual numbers — with verifiable math.