Risk tolerance is how much risk you are willing to take with your investments. Let’s look at the market crash of 2008-2009. In early March, when the market finally bottomed out, how did you feel? Were you rubbing your hands together with worry, thinking the financial world as we knew it was coming to an end? Or were you rubbing your hands with glee, anticipating a huge return by investing in such a low-priced market? The first response indicates you are probably a very conservative investor. The second likely means you are a very aggressive investor. Someone who was ambivalent, or not too worried and not too excited, would be somewhere in the middle. Your risk tolerance should guide you in choosing appropriate investments. No matter where you are on the risk tolerance continuum, the last thing you want is to not be able to sleep at night from being uncomfortable with where your money is.
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