I have got a story to tell…

"Risk hai toh ishq hai!" That’s what my friend used to say every time we talked about investing.?

He believed he had a huge risk appetite.

One evening last year, a friend called me, buzzing with excitement.

He had just received a hefty year-end bonus. He said, "I’m going all in on two stocks,"

Now the market correct like it has done many times in the past, his portfolio is down almost 35%.

His confidence had gotten way down.

He panicked and within days, he sold both stocks at a great loss.

And that’s when it hit me, he wasn’t actually high on risk appetite. He was low on risk tolerance.

Risk Appetite vs. Risk Tolerance

Most investors assume these two are the same. They’re not.

• Risk Appetite is the kind of risks you are willing to take. (Stocks, real estate, gold, or even crypto?)
• Risk Tolerance is the level of loss you can actually handle without panic. (Can you stomach a 15% drop? 30%? 50%?)

My friend, with no major financial obligations, had the risk appetite for equities. But emotionally, a 10% dip was enough to shake him.

Now, imagine someone his age but with household responsibilities, EMIs, kids’ education, and family expenses.

Their risk appetite itself wouldn’t allow them to go all in on equities, let alone test their tolerance.

Know Your True Risk Limit

The next time you believe you have a ‘high risk appetite,’ ask yourself:

• How much loss can I accept without stress?
• Will I panic if my portfolio dips 20%?
• Am I prepared to hold through tough times?

Risk is part of investing. But understanding your own risk tolerance can be the difference between long-term success and emotional investing.

So, what’s your real risk tolerance?