What a risk budget means
Investment risk is more than price volatility. It also includes whether you may need to sell soon, whether you can absorb a loss, and whether you can keep reviewing the information.
Define tolerable loss first
A short time horizon can make daily price movements more important. A long horizon does not solve a weakening business or poor liquidity by itself.
Risk contribution by asset
Before reviewing an asset, write down your goal, time horizon, tolerable loss, and likely cash needs. Defining risk in advance can reduce reactions to short-term news.
A hypothetical portfolio
A hypothetical investor may set a maximum tolerable portfolio loss of 10%, but allocating 10% to each holding does not cap the portfolio loss at 10%. Assets can move together, have different volatility, and be needed at different times. Separate emergency funds and near-term spending before defining capital available for risk.
Stress scenarios
Record weights, historical volatility, drawdowns, liquidity, and concentration by currency, exchange, or custodian. Historical observations do not guarantee a future distribution, so consider stress cases such as a sharp sell-off, rate shock, or trading halt. If leverage or collateral liquidation is involved, map the potential loss path explicitly.
Record and revisit assumptions
A risk budget is a management aid that makes concentration and trade-offs visible, not a formula that guarantees a loss limit. Low observed volatility does not prove safety, and correlations can change in a crisis. Keep assumptions and review dates so the framework can be revisited when income, goals, or cash needs change.