How Much Risk Can You Really Handle?

When you hear the word risk, what comes to mind? For many, it’s something to be avoided—something unpredictable or dangerous. But in the world of investing, risk is inevitable. And more importantly, it can be managed.

If the markets over the past few years have taught us anything, it’s this: understanding your relationship with risk isn’t just important—it’s essential. Whether you're just starting out in your career or planning for the next chapter, knowing both your capacity and tolerance for risk is one of the most important steps toward long-term financial confidence.

Unlike your height or your credit score, there’s no universal metric for risk tolerance. Plenty of online tools try to define it with a single number, but the reality is more nuanced.

We like to look at risk through two lenses:

1. Risk Capacity – What level of financial risk you can afford to take based on your current situation.
   
   
2. Risk Tolerance – How much risk you’re emotionally comfortable with.
   
   

Understanding both helps ensure your investments align with your reality and your mindset.

Your risk capacity is shaped by the facts: your age, income, cash flow, family responsibilities, savings, and financial goals.

If you’re early in your career with years of earning potential ahead of you and minimal expenses, you may be able to take on more market volatility. You have time to recover from downturns and let your investments grow.

On the other hand, if you're relying on your investments to cover monthly expenses—like someone in or approaching retirement—your risk capacity may be lower, even if your portfolio is large.

Here’s the key: risk capacity isn’t just about the size of your portfolio. It’s about how much of it you’ll need to rely on and when.

Your tolerance is all about how you feel. It’s shaped by your past experiences with money, the stories you’ve heard growing up, and how you respond emotionally when the market takes a dip.

This can be tricky to quantify, but it matters just as much—because even a perfectly balanced portfolio isn’t helpful if you can’t sleep at night watching it fluctuate.

That’s why many financial professionals use questionnaires, conversations, and behavior analysis to uncover your true risk tolerance.

Once you understand your capacity and tolerance, it’s time to make adjustments that fit. Here’s how:

• Educate Yourself: Being informed is the first step to reducing emotional decisions. Learn about the companies or funds you’re investing in—know what you own and why you own it.
  
  
• Diversify: Don’t put all your eggs in one basket. True diversification considers not just stocks vs. bonds, but the type of stocks or bonds you hold.
  
  
• Avoid Rules of Thumb: General formulas (like subtracting your age from 100 to determine stock allocation) can be helpful starting points, but they shouldn’t drive your whole strategy. Your life is unique—your investments should be, too.
  
  
• Work With a Professional: A financial advisor can help you identify opportunities, navigate market noise, and build a portfolio that balances both logic and emotion.
  
  

If the market’s recent swings have you feeling uneasy, you’re not alone. But remember, all investing involves some degree of risk—and that’s okay. The key is finding a level of risk that you’re both capable of and comfortable with, then sticking to a long-term plan.

Think of investing more like the tortoise than the hare: steady, consistent progress over time.

Looking for More Guidance?

If you’re ready to better understand your risk profile or want to talk through your investment strategy, we’re here to help. Our team offers personalized financial planning and investment management to help you make confident, informed decisions about your future. Click here to learn more about our services. 

Disclaimer:

The information provided here is for general informational purposes only and should not be construed as professional tax advice. Tax laws and regulations are complex and subject to change. For personalized advice tailored to your specific situation, it is always recommended to consult a qualified tax professional or accountant who can provide expert guidance based on your individual circumstances.