With inflation still soaring and markets still turbulent, it’s a good time to discuss an important concept: Risk tolerance.

You’ve probably heard those words bandied about when talk turns to investing. But do you know what they mean?

Risk tolerance is generally defined as the ability to stomach large swings in the value of your investment portfolio. Because the market, by nature, is very volatile, understanding your risk tolerance is vital for making prudent decisions.

Here are 3 factors to help you figure out how much risk you can tolerate:

After my divorce from the gambling husband, my inheritance was pretty much gone, with the exception of a few properties that gave me a small monthly income. But I did something smart.

When the rent from the properties would arrive, before I spent a cent, I’d put a portion into my savings account. I did it automatically. I filled out a form and the bank took are of the rest.

I didn’t even have to think about. And even though it wasn’t a lot, it’s amazing how my savings grew over time.

Later, as the cash accumulated, I automated my investing, by using a technique known as Dollar Cost Averaging (DCA-click to learn more). DCA takes the emotion out of investing, reduces the risk of losing a lump sum in a down market and reduces costs because you buy less when your investments are expensive, and more when they’re cheaper.

I’ll never forget my first investment on my own. A friend of my father’s was forming a limited partnership. He’d just opened T.J. Cinnamons, a retail outlet that sold sticky buns. And he needed to raise money.

I knew what sticky buns were. I had no idea what a limited partnership was, or the risk I was taking. But hey, this was my dad’s close friend. He was extremely wealthy, very smart, massively successful. So, it had to be a great thing, right?

When T.J. Cinnamons went under, I lost all my money.