Risk appetite is your willingness to accept the chance of loss in exchange for the chance of greater gain. It depends on personality, financial cushion, time horizon and goals. Markets also have a collective risk appetite that rises in optimistic periods and shrinks when fear dominates.
Key takeaways
- Higher expected return usually comes with a higher chance of drawdowns.
- Your risk appetite should match money you can leave invested through rough patches.
- A plan written in calm markets is easier to follow than decisions made in a panic.
- Risk appetite can change with age, income stability and life events.