risk graphic risk need risk tolerance risk capacity

What constitutes risk? How much risk are you comfortable to take? How much risk do you need to take?

Ask these questions to a group of individuals and each is likely to have a very different interpretation of risk and what it means to them.

The management of investment risk is a key part of the role we perform when structuring a Financial Plan for you.  We have developed a three dimensional approach to investment risk to help us understand what risk means to you:

  • Risk tolerance
  • Risk need, and
  • Risk capacity

Risk tolerance

Equity investments are volatile.  To establish your emotional tolerance to this volatility, or risk, we use an online scientific risk profiling system incorporating psychometric testing. 

Risk need

This dimension covers your ‘need’ to take investment risk to achieve your objectives, that is,  the Personal Rate of Return (PRR) required from your investments. Your future anticipated expenditure and the resulting growth or erosion of your capital (as demonstrated in your Cashflow Forecast) will provide an indication of the risk you need to accept.  

Risk capacity

The third dimension is risk capacity; the amount of loss you could sustain in adverse market conditions without affecting your lifestyle and financial aims.

Risk capacity will vary dependent upon your stage of life. Those some years off retirement and in employment have a much greater capacity for risk than  individuals who are living off their accumulated assets.

We also consider your investment horizon.  This may be related to your stage of life, health or possibly influenced by inter-generational planning issues.

Where tensions exist between these dimensions we will work with you to find the most appropriate solution.