Last week we talked about risk and how it relates to the timescale of your investments and the underlying volatility of the portfolio you build. Today I want to clear up, once and for all, some confusion about risk tolerance and risk capacity. This is essential to your investing success, so tune in…
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Risk Tolerance & Risk Capacity
For novice investors, risk can sound exciting, because they have heard that rewards accompany risky investments. For those in later life, perhaps with some investing miles under their tyres, risk is something to be wary of, if not avoided entirely. There are two major factors you need to consider when thinking about the risk you should take with your investments, and that’s what I’m carefully going to go through with you today.
This might be the most important episode in this season, so pay close attention.
In this session, you'll discover:
- That Risk Tolerance and Risk Capacity are two very different things
- One is your emotional ability to cope with investment loss, and
- The other is your financial ability to cope with investment loss.
- When a loss is not really a loss
- The best place to get your own risk tolerance measured
- A thought experiment to determine how you might react in certain circumstances
Resources mentioned in this week's show
Risk Profiling: myrisktolerance.com
Podcast: Season 2, Episode 1 – Why Invest?
Podcast: Season 2 Episode 2 – Risk, Volatility & Timescale
Free email course – Learn How To Invest
And of course, there is a full transcript available by clicking the big blue button below:
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Question: What was your risk tolerance? Were you surprised with the result of the test?
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