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How much loss you can accept, emotionally and financially.
Risk tolerance is how much ups and downs you can handle in your investments, both financially and emotionally. It depends on your goals, your time horizon and how you'd react to seeing your money drop.
Someone investing for retirement in 30 years can usually accept more stock-market swings than someone buying a house next year.
Picking investments that match your risk tolerance is what keeps you from selling in a panic during a crash.
Try it: Investor-Type Quiz