Why Risk Tolerance Is Only Part of the Conversation
A sound strategy considers willingness to take risk, financial capacity to absorb losses and the consequences of being wrong.
Risk tolerance describes how comfortable a person feels with uncertainty, but comfort alone is not enough. A complete assessment also considers risk capacity: the practical ability to absorb losses without disrupting essential goals.
Time horizon, income stability, liquidity needs, liabilities and concentration all influence capacity. The strategy should also consider risk required—the level of return needed to meet an objective. If required risk is higher than capacity allows, the answer may be to adjust the goal, timeline or savings plan rather than simply taking more investment risk.
This article is general information and not personalised investment advice.