What's the difference between risk tolerance and risk capacity?

Risk tolerance is emotional — how much volatility you can stomach without panic-selling — while risk capacity is financial — how much risk your situation can actually afford given your timeline, income stability, and savings. They often disagree, and that's the catch. A young investor with decades to recover has high capacity but might have low tolerance and bail at the first crash; a near-retiree might feel comfortable with stocks (high tolerance) but have low capacity because they'll need the money soon. The right allocation respects the lower of the two: don't take more risk than your timeline can absorb, and don't take more than you can emotionally hold through a downturn, since selling at the bottom is what truly destroys returns. Be honest about how past crashes made you feel. Gauge both at wealthserene.com/assessments/investor-profile before setting your allocation.