Risk Tolerance Vs Risk Capacity: Knowing The Difference


The economy that we all wake up in each day under COVID-19 looks a lot different from the one that existed before the virus took hold in the United States and around the world. It has been a major point of reflection for people all around the world. Many are reviewing how they have ran their personal financial life up to this point and reconsidering some of the steps that they have taken. As such, one of the items that some have looked at is their risk tolerance versus their risk capacity. The two are different, and we want to explore why that is. Risk Tolerance The amount of risk that a trader is comfortable with taking on is a personal choice and something that each person has to decide on their own. People have different risk tolerance levels often based on factors such as their age, income, and goals. All of these factors can determine how much they want to put on the table because they are constantly doing mental calculations about how much they need that money and how much they seek to earn. Getting the right risk tolerance level for an individual can help that person avoid some sleepless nights as they don’t have to stress staying up day and night worrying about their portfolio. Risk Capacity This is a bit different from risk tolerance in that it is the number that an investor has to put at stake in order to reach their financial goals. This number can certainly different from risk tolerance in a lot of ways. After all, one may not feel completely comfortable with how much money they have to put at risk in order to get to their goals, but that does not mean that the number is inaccurate. The risk capacity number is determined by a time frame that someone has to actually reach their goals as well as what the exact number of dollars that someone needs to reach the goals that they do have. Knowing this number is important because an investor can take their risk capacity number and try to use it to make themselves feel more comfortable with their risk tolerance number. It is a psychological game that we all have to play with ourselves, but just knowing this number alone can be extremely helpful. Getting The Balance Right People fall either on the too conservative or too aggressive side of their risk tolerance. They can review those numbers and see which side of the ledger they happen to fall on. A lot of people need to tone down how much risk they are taking on and realize that they do not have to earn their entire retirement all at once. However, there are also some individuals who need to be told to pick it up a little. Everyone has different goals and a different length of time to reach them. COVID-19 has put a lot of fear into the market, and many investors are getting too conservative in their approach at this time. This is the wrong move to make. The pandemic does not know when you are set to retire, and it does not know what your objectives are. You have to review all of that information for yourself and make the wisest choices based on your current state in life and what your plans are going forward. Consider the way that the world has changed, but understand that you should not be overly fearful because of the situation that exists today.

Recent Posts

Archive

Follow Us

  • Grey Facebook Icon
  • Grey Twitter Icon
  • Grey LinkedIn Icon
  • LinkedIn Social Icon
  • Facebook Social Icon

DISCLAIMER

iInformational statements regarding insurance coverage are for general description purposes only. These statements do not amend, modify or supplement any insurance policy. Consult the actual policy or your agent for details regarding terms, conditions, coverage, exclusions, products, services and programs which may be available to you. Your eligibility for particular products and services is subject to the final determination of underwriting qualifications and acceptance by the insurance underwriting company providing such products or services.

This website does not make any representations that coverage does or does not exist for any particular claim or loss, or type of claim or loss, under any policy. Whether coverage exists or does not exist for any particular claim or loss under any policy depends on the facts and circumstances involved in the claim or loss and all applicable policy wording.

 NO RENDERING OF ADVICE

The information contained within this website is provided for informational purposes only and is not intended to substitute for professional advice. In accessing this service, no client, advisory, fiduciary or professional relationship is implicated or established and neither Kilcrease financial,inc nor any other person is, in connection with this site, engaged in any professional services or advice. Internet subscribers, users and online readers are advised not to act upon this information without seeking the service of a professional. kilcrease financial,inc specifically disclaims any liability for any direct, indirect, incidental, consequential or special damages arising out of or in any way connected with access to or use of the website (even if kilcrease financial,inc has been advised of the possibility of such damages), including liability associated with any viruses which may infect a user’s computer equipment.

COPYRIGHT & TRADEMARKS

The trademarks, logos and service marks displayed on this website are the property of kilcrease financial, inc. Users are prohibited from using any of these without the written permission of kilcrease financial,inc. All content on the website is protected by copyright. Users are prohibited from modifying, copying, distributing, transmitting, displaying, publishing, selling, licensing, creating derivative works or using any content on the website for commercial or public purposes.