What's Your Risk Capacity?

Mar 28, 2019 | Sandra Cramen


Share

Risk capacity is not based on feelings about risk. It’s not even based on any specific investment. Instead, it relates to how much risk you can afford to take. Risk tolerance reflects your personality, your beliefs and your investment experience.

When you first meet with a financial Advisor, they will ask you some questions about your risk tolerance. They will want to understand how comfortable you would be with market volatility and how you might react to seeing your investments drop in value. They will want to know if you are someone who embraces investment risk because it opens the door to more opportunity, or if you’re more risk averse – and likely to lose sleep when the market loses ground.

Risk tolerance relates to your willingness to take on risk to achieve your goals. It’s based on your beliefs, your personality and your investment experience. Think of it as your mental and emotional ability to handle the impact of possible investment losses. But is your risk tolerance in line with your financial ability to withstand those losses? This is a different question. It has to do with your risk capacity. Read more here.