What is the difference between risk tolerance and risk capacity?

Risk tolerance and risk capacity are two concepts that need to be understood clearly before making investment decisions for yourself or for a client. Together, the two help to determine the amount of risk that should be taken in a portfolio of investments.

Risk Tolerance

Risk tolerance is the amount of risk that an investor is comfortable taking, or the degree of uncertainty that an investor is able to handle. Risk tolerance often varies with age, income and financial goals. It can be determined by many methods, including questionnaires designed to reveal the level at which an investor can invest, but still be able to sleep at night.

Risk Capacity

Risk capacity, unlike tolerance, is the amount of risk that the investor “must” take in order to reach financial goals. The rate of return necessary to reach these goals can be estimated by examining time frames and income requirements. Then, rate of return information can be used to help the investor decide upon the types of investments to engage in and, the level of risk to take on.

This question was answered by Ayton MacEachern via Investopedia (http://www.investopedia.com)

start-the-conversation

The information in this material is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements. The information does not attempt to examine all the facts and circumstances that may be relevant to an individual’s financial needs. Payne Wealth Partners, Inc. is not soliciting any action based on these statements.

Contact Our Offices

Payne Wealth Partners, Inc.
Keystone Financial Consulting
601 N Cross Pointe Blvd
Evansville, IN 47715
Phone: 812-477-6221
Toll Free: 888-477-6221
  • YouTube
  • Follow us on twitter
  • Follow us on facebook
  • Follow us on linkedin
  • GooglePlus
×

FREE Financial Planning Guides and other exclusive content!

Get instant access to download all our current - and future - informational whitepapers and guides plus join our mailing list to receive the latest Payne Wealth blog posts. 

SUCCESS! Please check your e-mail inbox for your access link and password.