An investor’s Risk Tolerance is their willingness to put their money in investments whose value could go down, in the hope that they in fact go up. In other words, Risk Tolerance reflects an investor’s long-term, stable, and reasoned preference for trading off risk and return.
Risk Tolerance is a long-term, stable psychological trait that rarely varies with changes in external circumstances.
This is important.
Because often assessments that claim to measure Risk Tolerance – an investor’s long-term, reasoned, willingness to trade-off risk and return – in fact confuse the measurement with more short-lived reactions to emotionally fervent circumstances. They end up answering merely how an investor feels about risk at the time they took the assessment... which is not wise ground on which to base a long-term investment portfolio.
A Risk Tolerance measure forms part of a Suitable Risk Level, or risk profile. As such, it provides guidelines for assessing the suitability of an investment selection, but it is not the same as that 'profile', or that investment selection itself.