Risk Capacity

Each investor has a unique risk capacity and can be identified by a risk capacity score, a measure of how much risk an individual can manage. This score is based on five specific risk dimensions of an investor.

The Five Dimensions of Risk Capacity

• 1) Time horizon and liquidity needs
• 2) Attitude toward risk
• 3) Net worth
• 4) Income and savings rate
• 5) Investment knowledge

Risk capacity can be regarded as a measurement of an investor’s ability to earn stock market returns. Calculating risk capacity is the first step to deciding which portfolio will generate optimal returns for each investor. A risk capacity score determines the proper risk exposure for an investor’s portfolio.

Risk Capacity Survey

An easy and efficient way to determine an investor’s risk capacity is to complete a questionnaire or survey that evaluates and quantifies each of the five dimensions of risk capacity.

Higher scores signify a higher capacity for risk, a longer time horizon and an ability to withstand market volatility. Investors with higher scores are generally recommended to hold portfolios with a larger allocation of global equities. In contrast, lower scores signify a lower risk capacity and a higher need for liquidity. Investors with lower scores are steered toward more conservative portfolios that hold a higher proportion of short-term investments such as fixed income.

What's your Risk Capacity? Find out right now when you take the simple 5-minute survey. It will lead you to one of the ten IFA Index Portfolios IFA has built for 401(k) plans.