Most investors are familiar with risk tolerance — a psychological measure that reflects how you perceive risk and respond to market fluctuations. While understanding risk tolerance is essential, it doesn’t tell the whole story.

Risk capacity, in contrast, is an objective measure of your financial circumstances — not your feelings about risk. It analyzes your ability to absorb potential losses without jeopardizing your long-term goals. Factors such as your time horizon to retirement, income stability, savings rate, and future spending needs all determine how much risk you can afford to assume.

For instance, someone approaching retirement has a decreasing risk capacity because they are nearing the point of shifting from saving to spending mode. Conversely, younger investors with a longer time horizon have higher risk capacity, since they have more years to recover from short-term market downturns.

That’s why it’s critical that we evaluate both your risk tolerance and risk capacity when shaping your investment strategy. Together, these factors ensure your portfolio is appropriately aligned — not only with how you feel about risk but also with what your financial situation actually allows.

Let’s talk about how to ensure your financial strategy supports both your comfort level and long-term security.

In the meantime, I hope you enjoy (and share!) these articles given the wealth of information they contain.

Thank you,
Paul Celentano