When we talk about risk with clients, we often end up discussing terms like “conservative” or “aggressive.” These are basic terms to use when talking about risk, but the definition of each change from person to person. At Twin Rivers, when we talk about risk, we are gaining an understanding of your entire risk profile, which we break up into three classifications: risk tolerance, risk capacity, and risk required. 

Risk Tolerance

A person’s risk tolerance is the jump-off point when discussing risk and is where we most commonly hear terms like conservative and aggressive. Clarifying what a person means when they use a word like conservative is critical to developing a risk profile, so advisors ask clarifying questions. “How much does a change in your account values affect your sleep at night?” or, “Are you the type of person that checks their account daily?” Once our team understands your definition of risk and how much you can handle for your sanity, we focus on how much stress your financial plan can take.

Risk Capacity 

The amount of fluctuation you can realize in your investment accounts without changing your lifestyle is our risk capacity definition. Using our planning software, our advisors can demonstrate how fluctuations in your cash flows or investment accounts affect how long your assets will last. When our clients feel concerned during times of uncertainty, they can reflect on their financial plan’s risk capacity. Understanding a client’s risk capacity is critical when developing their custom portfolios, but we must also understand the risk required to obtain their future vision.

Risk Required

What is the target we are trying to hit with your investment accounts? Your advisor has taken 

the time to understand your vision of the future, and now we need to determine the type of return in your portfolio needed for you to obtain it. For some, protecting accounts from inflation is all that is necessary to maintain a person’s lifestyle. Others are looking to generate an additional stream of income during retirement, and many are still saving and seeking growth for the future. Once we have a mutual understanding of what target you need to hit to obtain the lifestyle you have envisioned for yourself, we will create a portfolio that only takes on the risk required to get you there. 

We need to understand your risk tolerance and how changes in account values affect you directly. Your financial plan’s risk capacity directly relates to your ability to maintain your lifestyle. Risk required is how much you need to earn in your investment accounts to obtain that vision. Our clients’ risk profiles play a significant role in developing an investment strategy and custom portfolio. If you have any questions about your risk profile or your financial plan, please do not hesitate to contact your advisor.