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Know your limits: How to assess your financial risk tolerance

September 15, 2026
Drew Maginn

Understanding your financial risk tolerance is one of the hardest aspects of investing. While there are many helpful tools available to help you build your own investment risk profile, your ability to tolerate risk, especially when it comes to managing your own money, is likely going to change over time. However, by taking the time to learn more about yourself, you can create an investment strategy that aligns with your risk threshold while avoiding some common mistakes that can derail even the most seasoned investors.

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What is financial risk tolerance?

According to the Canadian Investment Regulatory Organization (CIRO), financial risk tolerance refers to your comfort level taking on risk and managing the unknown when investing. While risk tolerance is subjective and therefore looks different for each of us, it is not a standalone concept and closely connects to other areas, including:

  • Risk capacity: An objective measure of how much can you lose in investments before it starts to negatively impact your life.

  • Risk required: The amount of risk needed to help you achieve your financial goals. For example, if you have lofty goals with a smaller amount of money to invest, you may need to take on more risk or revisit whether these goals are realistic for you.

  • Risk and return: The connection between your risk tolerance and its potential financial return (i.e., the bigger the risk, the bigger the reward).

Keeping all of this in mind, the process for understanding your comfort level with risk requires you to consider many different factors before you make any major financial decisions. 

How can I determine my risk tolerance for investing?

Many trusted sources offer free tools to assess your risk tolerance, such as:

Although the specific questions may vary across each tool, they explore the following common areas.

  • Investment objectives (e.g., What are your goals for your portfolio?)

  • Personal information (e.g., age, income, net worth)

  • Investment timelines (e.g., When and how do you want to use your money? When will it likely be withdrawn and in what amount?)

  • Attitude toward risk (e.g., How knowledgeable are you about investing? How would you describe your investment philosophy? How long are you willing to hold your investments, even if there is potential for a downturn in your finances, before a return?)

  • Market volatility (e.g., What type of risk and return are your comfortable with, both financially and emotionally? How willing are you to deal with shifts in the market?)

While the results from these questionnaires are not a perfect science, they can give you a starting point for understanding your comfort level with risk before you start planning your investment strategy.

Staying true to yourself: How to build a portfolio based on your risk tolerance

As you learn more about yourself and your investing preferences, you will become more aware of where you fall as it relates to risk. Most of us fall into three broad investing categories.

  • Conservative (low risk): You prefer investments that are safe and secure (e.g., guaranteed investment certificates, high interest savings accounts). While your returns might be lower, you prioritize financial stability and predictability and would likely be unable to handle swings in the market.

  • Moderate (medium risk): While you prefer having investments that are safer (e.g., mutual funds, stocks of well-known companies), you are willing to assume some risk for growth and may be more open to a mixture of investments.

 

  • Aggressive (high risk): You have a high tolerance for the risk, are willing to invest in less proven areas (e.g., startup companies, initial public offerings, emerging areas like cryptocurrencies or collectibles) and can manage the financial and emotional stress of fluctuations with your money. 

While having this knowledge is helpful, always keep in mind that your tolerance can change over time. For example, an aggressive investor may become more moderate over time once they start a family or begin managing finances for their parents or other loved ones.

Avoiding common investing mistakes, regardless of your risk tolerance

Whether you’re a beginner or experienced investor, you can be impacted by the same financial missteps. Many investors fall victim to their own poor behaviour and blame others for their problems instead of holding themselves accountable. You can avoid this fate by learning from the mistakes of others, including the below.

  • You are hands off with your investment strategy: Like any decision you make with your money, you need to stay engaged with your investment strategy, beyond a quick balance check on your phone every now and then. Disengagement often happens when your investments are being managed by someone else and you don’t bother to track and evaluate your portfolio on a regular basis.

    For example, in 2022, the Ontario Teachers’ Pension Plan lost an estimated $95 million investing in a failed cryptocurrency platform which led to a class-action lawsuit and overhaul of their practices to regain trust in their plan members. If one of their members didn’t notice and hold them to account, who knows how these problems could have spiralled in the future.

  • Your investment strategy ignores the opinions of others: While understanding your own risk tolerance is important, your investment strategy needs to consider the risk tolerance of others who are impacted by your decisions. Too often, one person assumes the sole responsibility of managing the finances for their family without understanding everyone’s comfort with risk.

    This is reflected in the 2026 Love and Money Benchmark Survey, which reports that 17 per cent of Canadians have considered ending a relationship because of financial issues, which is up from 11 per cent last year. Unfortunately, this lack of alignment on risk typically comes to light when things go poorly, money has been lost and everyone is suffering through the emotional and financial mess that’s been created.

 

  • You think you’ve got investing “figured out”: When assessing your own investment knowledge, it’s typically best to do so with caution. Many investors fall victim to their own inflated confidence, investing in areas they don’t fully understand and refusing advice from professionals until it’s too late. 

While some people are fully capable of managing their own portfolio, this responsibility requires a skillset that many of us simply don’t have. If you feel that you’re capable of taking on your own portfolio, consider hybrid investing as a first step. This allows you to manage some of your own investments while also maintaining a separate portfolio working with a financial advisor. If things go well, you’ve earned the right to take greater control in the future.

Evaluating your own tolerance for risk is sometimes described as trying to measure air with a ruler. Just when you think you have it all figured out, an unexpected change can make you quickly realize that your calculations weren’t as accurate as you once thought. However, by taking the time to honestly assess yourself and how you deal with risk, you are more likely to choose an investment strategy that helps you reach your financial goals without keeping you or your loved ones up at night.  

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