Why is risk tolerance important in investing?

For me, risk tolerance means the level of loss that I am willing to accept in exchange for the chance to achieve higher than average profits. For one, the tolerance threshold will end at PLN 1,000, and for another, at PLN 10,000 or a million. It is a completely individual matter. The point is not to obsess over the loss you have suffered when you fail, to get angry or even contemplate suicide. No money is worth harming your body.

A completely different risk is associated with owning government or corporate bonds, emerging market stocks or cryptocurrencies. Each of these types of assets is also classified into more or less secure.

Financial markets are characterized by a cyclical nature, i.e. the alternating periods of boom and bust lasting from several to several years, depending on the type of market and the macroeconomic situation. For this reason, better returns on investment are often achieved by patient, long-term investors, because even in the event of a loss on a given asset, they can still make up for it after the next bull market (Warren Buffett is a perfect example for me).

A beginner should in my opinion not have more than 5-10 percent. risky assets (I mean cryptocurrencies and derivative instruments such as futures and options) and only on the condition that you expect to lose them completely.

Elderly people should rather focus on capital protection and abandon them altogether. Deposits or bonds will be better.

Younger market participants have more room for maneuver, provided that they do not invest funds that they may need in a short time. They should not throw all their money into risky assets, as they usually do not have experience with investing yet and if they lose money completely, they will need time to rebuild capital and start over.

There is no universal recipe for the composition of such a portfolio, everyone should assess their level of experience and willingness to risk themselves and, above all, educate themselves on a regular basis and invest only what can be lost.

In investing, risk tolerance plays a key role, as each investment carries a certain level of risk that can be difficult to predict. Determining risk tolerance allows investors to understand their readiness to incur potential losses and determine the appropriate level of risk they are willing to accept. To determine their risk tolerance, an investor can use various tools and questionnaires to help identify their comfortable level of risk. It is important to take into account their own investment goals, time horizon, level of trust in the market, and investment experience. Investors can also seek the help of financial advisors who can assist them in determining the appropriate risk tolerance and constructing a balanced investment portfolio that meets their needs and preferences.