How to Evaluate Risk Tolerance Before Investing

Investing is an exciting step towards building your financial future, but before you dive in, there’s one important question you need to ask yourself: How much risk am I actually comfortable with?

Understanding your risk tolerance—how much financial uncertainty you’re willing and able to accept—is a key part of making smart investment choices. In South Africa’s fast-moving economic climate, it’s more important than ever to get this right.

In this guide, we’ll help you understand what risk tolerance really means, what influences it, and how to assess your own profile before investing.

What is Risk Tolerance?

Risk tolerance is essentially your ability and willingness to handle ups and downs in your investments .

It’s about how comfortable you are with the idea that your investments could temporarily lose value—and how that affects your behaviour.

There are two main parts to it:

• Ability to take risk: This relates to your financial situation—your income, savings, age, and how long you plan to invest.

• Willingness to take risk: This is more about your personality and mindset. Are you calm when the market dips, or does it keep you up at night?

Knowing the difference helps you make choices that match both your head and your heart.

Key Factors That Influence Risk Tolerance

Your risk tolerance isn’t set in stone—it’s shaped by a combination of personal, financial, and emotional factors.

Understanding what influences your comfort with risk can help you make more confident and suitable investment choices.

1. Age and Investment Horizon

Generally speaking, younger investors have more time to ride out market swings, so they can often afford to take more risks.

As you get closer to retirement , preserving capital becomes more important, so a more cautious approach may be suitable.

2. Financial Circumstances

If you have a stable income, a solid emergency fund, and minimal debt, you might be better positioned to take on more risk.

On the other hand, if your budget is tight, you may need to stick with safer options.

3. Investment Goals

Are you saving for a home in five years, or building wealth for retirement in 30?

The shorter your timeline, the less time you have to recover from market dips—so lower-risk investments might be more appropriate.

4. Emotional and Behavioural Factors

This one’s often overlooked. Some people can watch the market drop and stay calm, knowing it’ll bounce back.

Others feel the urge to sell immediately and lock in losses. Neither approach is right or wrong—it’s just about knowing yourself.

How to Assess Your Risk Tolerance

You don’t need a finance degree to figure out your risk tolerance. Here are a few simple ways to start:

Self-Assessment

Think about past financial experiences.

How did you react during stressful money situations? Would you be willing to accept short-term losses for long-term gains? Honesty is key here.

Use a Risk Profiling Tool

Many financial institutions and investment platforms offer free online questionnaires.

These ask you about your goals, financial situation, and emotional responses to market scenarios to help determine your risk profile.

Talk to a Financial Adviser

If you're unsure, speak to a qualified financial adviser . They can help you assess your full financial picture and guide you towards an investment strategy that suits both your goals and your comfort level.

Risk Tolerance in the South African Context

Living and investing in South Africa comes with its own unique set of risks—and opportunities. Here's what you should keep in mind:

Economic Conditions

South Africa's economy can be affected by load shedding, inflation, and shifts in government policy. Currency volatility (especially the rand against the dollar or euro) can also impact returns on offshore investments.

Investment Options

You have access to a broad range of investment vehicles, including government bonds, unit trusts, shares on the JSE, and offshore investments.

Each option comes with its own risk profile. For example, equities may offer higher growth but are more volatile than fixed-income funds.

Regulatory Environment

Make sure you're aware of local tax rules, exchange controls, and retirement regulations. Using tools like Tax-Free Savings Accounts (TFSAs) can help manage both risk and returns within a favourable structure.

Aligning Your Investments with Your Risk Tolerance

Once you understand your risk profile, it’s time to build a strategy around it.

Diversify Your Portfolio

Don’t put all your eggs in one basket. Spreading your money across different asset classes—like equities, bonds, and property—can help reduce overall risk.

Review and Adjust Regularly

Your financial situation and goals may change over time, and so might your risk tolerance. Review your investments at least once a year, or whenever there's a major life change.

Use Risk Management Tools

Consider strategies like stop-loss orders or gradual investment (e.g. monthly contributions instead of lump sums) to reduce your exposure to sudden market shifts. Keeping a cash buffer for emergencies can also ease the pressure.

Final Thoughts

Investing is never completely without risk—but that’s not a bad thing. Taking on some level of risk is how you grow your wealth over time. The key is to take the right amount of risk for you.

By understanding your risk tolerance, you can make informed decisions that align with your goals, personality, and financial reality. Whether you’re a first-time investor or looking to refine your portfolio, a thoughtful approach to risk will help set you up for long-term success.

If you’re unsure where to start, we’re here to help. Speak to one of our financial advisers today to find an investment strategy that fits your life and your future.