Risk tolerance is emotional — how much of a drop you can psychologically stomach without selling. Risk capacity is mathematical — how much of a drop you can actually afford without derailing your life. They're different numbers. A 25-year-old with steady income has enormous capacity. She may have zero tolerance if she's never watched her savings drop. A 62-year-old nearing retirement has plenty of tolerance (decades of experience) but near-zero capacity. Both numbers constrain your allocation. The lower of the two usually wins.

“Capacity says 'you can afford to lose X.' Tolerance says 'you can stand to lose Y.' Invest at the smaller one.”