It is important for you to understand your tolerance for risk and capacity to recover from investment losses.  Financial professionals need to understand this also.  It is part of the understanding needed to help develop a foundation to guide you through your life’s journey. 

Risk tolerance is your capacity to withstand a loss.  Your capacity to withstand a financial loss is your ability to recover from or absorb a financial loss and still be able reach your financial goals. If the probability of an investment portfolio is too low, then the person does not have the capacity to withstand the loss.

If you do not have the tolerance or capacity to withstand a loss, something else may need to be changed.  It may be any combination of actions including: increasing income, lowering expenses, increasing savings, or lowering financial goals.   

The reliability of your sources of income is another factor to consider.  If have a good job with a strong reliable company in a growing industry, you are in a better position to withstand investment losses.   However, if you are not satisfied with your employment you are not in as good of a position to withstand investment losses. 

Age and health are two other factors to consider.  If you are in the earlier stages of you career, you have more time and resources to recover from investment losses.  The existence of health issues generally reduces the ability and flexibility to withstand losses. 

Future plans to start a new business and to travel extensively are two other factors to consider.  These plans may reduce your ability and flexibility to recover from investment risks. 

This discussion is an introduction to an understanding of your risk tolerance and capacity.  Without this understanding, your financial planning may not be achievable.
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