Some people are more comfortable with risk than other people. Personalities are different, and there is nothing fundamentally better about being a risk-taker or a risk-avoider. Risk tolerance is a financial industry measure. It refers to an investor willingness to take risks and the ability to stomach losses.

High-risk tolerance means an investor is aggressive and will find satisfaction in taking higher levels of risk in exchange for the possibility of higher rewards. It also means the investor can tolerate larger losses, knowing that there might be larger gains later.

A low-risk tolerance means an investor is conservative and will take comfort in preserving principal, knowing that lower-risk investments will mean lower returns. Risk tolerance changes over time. Age, income, and circumstance all interact to form your current level of risk tolerance.

As various factors change in your life, you will find that your risk tolerance rises or falls. Pay attention to your current risk tolerance, and be aware of the way your feelings about risk are affecting your judgment. Investors can assess their degree of risk tolerance by taking one of a number of different risk tolerance questionnaires.

In addition, it can be useful to review worst-case returns for different asset classes historically in order to get an idea of how much money one would feel comfortable losing if his or her investments have a bad year or bad series of years.