What Is Risk Tolerance? Overview and Why It Matters

By Kristi Waterworth – Updated Jul 19, 2025 at 11:56 PM | Fact-checked by Frank Bass

Key Points

Risk tolerance determines suitable investments and the handling of market downturns.
It's split into three types -- high, moderate, and low -- affecting asset choices.
Understanding your risk tolerance guides investment strategies and emotional responses.

There are many extremely important terms for new investors to learn, but arguably none are more important than risk tolerance. Risk tolerance tells you everything you need to know about what kinds of investments are best for you and how to best weather financial storms.

Loading paragraph...

A choose your own adventure graphic about risk tolerance. — Image source: The Motley Fool.

Loading image...

Loading paragraph...

Study: How Gen Z and Millennial Investors Think About Risk

Understanding risk a core part of successful investing, and we wanted to know how Gen Z and millennial investors see it.

Investing in Safe Stocks and Low-Volatility Stocks

These companies might be a good bet if you're looking for limited volatility.

Is It Safe to Invest During a Recession?

When money is tight, where should your investment dollars go?

Loading hub_pages...

Knowing yourself can also help you balance your investments. This allows you to dip your toe into riskier investments while still holding on to the proverbial dock of more secure investments, such as exchange-traded funds (ETFs) tied to major indexes.

For example, if you're a low risk-tolerant investor but want to get in on a new cryptocurrency offering, you may find that you can handle exposing 1% of your investable cash to that level of risk, so long as 50% of it is in bonds.

Loading paragraph...

About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

TMFMaldivesBlue

@MaldivesBlues

The Motley Fool has a disclosure policy.